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Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods

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  • James E. Anderson

    ()
    (Boston College)

  • Will Martin

    (World Bank)

Abstract

The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify greater public good provision than indicated by traditional, compensated analyses. We develop a model including multiple public goods and taxes and derive consistent measures of the marginal benefit of public goods and their marginal social cost inclusive of tax distortions using both compensated and uncompensated measures of the Marginal Cost of Funds (MCF). Our analysis confirms that the desirability of tax financed public projects is independent of whether compensated or uncompensated methods are used. The main innovation shows that the costs or benefits of providing particular public goods should be adjusted by a simple, benefit multiplier not previously seen in the literature if an uncompensated MCF is used.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 731.

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Date of creation: 30 Jan 2010
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Publication status: Forthcoming, Journal of Public Economic Theory
Handle: RePEc:boc:bocoec:731

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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
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Web page: http://fmwww.bc.edu/EC/
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Keywords: fiscal policy; second best; public goods; distortions; costs of taxation; marginal cost of funds; marginal excess burden; thought experiment;

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