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When Do Distortionary Taxes Reduce the Optimal Supply of Public Goods?

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  • Gaube, Thomas
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    Abstract

    It is often argued that the optimal level of public good provision is below the first-best level as long as the government's expenditures have to be financed by distortionary taxes. I examine this hypothesis and show that it is correct in a representative consumer economy if (i) the public good is normal and (ii) private commodities are normal and gross substitutes. Otherwise, counterexamples can be constructed. These results hold also with heterogeneous households provided that equity considerations are ignored. In general, however, distributional objectives may lead to a higher level of public expenditures in second best than in first best.

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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 574.

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    Length: pages
    Date of creation:
    Date of revision: Apr 1999
    Handle: RePEc:bon:bonsfa:574

    Contact details of provider:
    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

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    Keywords: public goods; distortionary taxation;

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    Cited by:
    1. Thomas Gaube, 2000. "Efficient Public Good Provision with Nonlinear Income Taxation," Econometric Society World Congress 2000 Contributed Papers 0850, Econometric Society.

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