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Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects

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Author Info
Will Martin () (World Bank)
James E. Anderson () (Boston College)

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Abstract

The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify very much lower measures of the marginal welfare cost of taxes and greater public good provision than indicated by traditional, compensated analyses. We confirm that this difference remains substantial with newer elasticity estimates, but show that either compensated or uncompensated measures of the marginal cost of funds can be used to evaluate the costs of taxation– and will provide the same result– as long as the income effects of both taxes and public good provision are incorporated in a consistent manner.

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Publisher Info
Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 617.

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Length: 27 pages
Date of creation: 08 Sep 2005
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Handle: RePEc:boc:bocoec:617

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Related research
Keywords: fiscal policy; second best; public goods; distortions; costs of taxation; marginal cost of funds; marginal excess burden; thought experiment.;

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Find related papers by JEL classification:
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chris Jones, 2005. "Why the Marginal Social Cost of Funds is not the Shadow Value of Government Revenue," ANUCBE School of Economics Working Papers 2005-449, Australian National University, College of Business and Economics, School of Economics. [Downloadable!]
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