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Should We Use Distributional Weights in CBA When Income Taxes Can Deal with Equity?

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Author Info
Johansson-Stenman, Olof (Department of Economics, School of Economics and Commercial Law, Göteborg University)

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Abstract

Kaplow (1996) and others argue forcefully in favor of using the standard cost-benefit test alone, without any distributional concern, given “standard simplifying assumptions.” This paper, on the contrary, demonstrates that distributional weights, equal to the social marginal utility of income, should be applied in cost-benefit analysis, given weak separability in public goods instead of in leisure. This result holds for linear as well as non-linear income taxes, and whether they are optimal or not. A correspondingly modified Samuelson rule is derived and more general policy recommendations discussed.

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Publisher Info
Paper provided by Göteborg University, Department of Economics in its series Working Papers in Economics with number 35.

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Length: 22 pages
Date of creation: 28 Feb 2001
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Handle: RePEc:hhs:gunwpe:0035

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Postal: Department of Economics, School of Business, Economics and Law, Göteborg University Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Related research
Keywords: public goods; distributional weights; equity and efficiency; separability; cost-benefit; optimal taxation;

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Find related papers by JEL classification:
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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  1. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Blackwell Publishing, vol. 39(3), pages 297-302, July. [Downloadable!] (restricted)
  2. Hylland, Aanund & Zeckhauser, Richard, 1979. " Distributional Objectives Should Affect Taxes but not Program Choice or Design," Scandinavian Journal of Economics, Blackwell Publishing, vol. 81(2), pages 264-84.
  3. Hausman, Daniel M & McPherson, Michael S, 1993. "Taking Ethics Seriously: Economics and Contemporary Moral Philosophy," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 671-731, June. [Downloadable!] (restricted)
  4. Olof Johansson-Stenman, 2000. "On the Value of Life in Rich and Poor Countries and Distributional Weights Beyond Utilitarianism," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 17(3), pages 299-310, November. [Downloadable!] (restricted)
  5. Easterlin, Richard A., 1995. "Will raising the incomes of all increase the happiness of all?," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 35-47, June. [Downloadable!] (restricted)
  6. Oswald, Andrew, 1997. "Happiness and Economic Performance," The Warwick Economics Research Paper Series (TWERPS) 478, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  7. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Blackwell Publishing, vol. 41(1), pages 119-28, January. [Downloadable!] (restricted)
  8. Louis Kaplow, 1996. "A Fundamental Objection to Tax Equity Norms: A Call for Utilitarianism," NBER Working Papers 4961, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Dasgupta, Partha, 1998. "Population, consumption and resources: Ethical issues," Ecological Economics, Elsevier, vol. 24(2-3), pages 139-152, February. [Downloadable!] (restricted)
  10. J. Solnick, Sara & Hemenway, David, 1998. "Is more always better?: A survey on positional concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 373-383, November. [Downloadable!] (restricted)
  11. Boadway, Robin & Keen, Michael, 1993. "Public Goods, Self-Selection and Optimal Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 463-78, August. [Downloadable!] (restricted)
    Other versions:
  12. Wilson, John Douglas, 1991. "Optimal Public Good Provision with Limited Lump-Sum Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 153-66, March. [Downloadable!] (restricted)
  13. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, vol. 4(4), pages 335-342, November. [Downloadable!] (restricted)
    Other versions:
  14. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
  16. Layard, Richard, 1980. "On the Use of Distributional Weights in Social Cost-Benefit Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1041-47, October. [Downloadable!] (restricted)
  17. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 67(1), pages 105-122, January. [Downloadable!] (restricted)
  18. Christiansen, Vidar, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Blackwell Publishing, vol. 48(3), pages 447-57, July. [Downloadable!] (restricted)
  19. Squire, Lyn, 1980. "On the Use of Distributional Weights in Social Cost-Benefit Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1048-49, October. [Downloadable!] (restricted)
  20. Blomquist, Suren & Christiansen, Vidar, 1995. " Public Provision of Private Goods as a Redistributive Device in an Optimum Income Tax Model," Scandinavian Journal of Economics, Blackwell Publishing, vol. 97(4), pages 547-67, December.
  21. Ng, Yew-Kwang, 1987. "Relative-Income Effects and the Appropriate Level of Public Expenditure," Oxford Economic Papers, Oxford University Press, vol. 39(2), pages 293-300, June. [Downloadable!] (restricted)
  22. Frank, Robert H, 2000. "Why Is Cost-Benefit Analysis So Controversial?," Journal of Legal Studies, University of Chicago Press, vol. 29(2), pages 913-30, June.
  23. Johansson-Stenman, Olof & Carlsson, Fredrik & Daruvala, Dinky, 2001. "Measuring Hypothetical Grandparents Preferences For Equality And Relative Standings," Working Papers in Economics 42, Göteborg University, Department of Economics. [Downloadable!]
  24. Johansson-Stenman, Olof, 1998. "On the Problematic Link between Fundamental Ethics and Economic Policy Recommendations," Journal of Economic Methodology, Taylor and Francis Journals, vol. 5(2), pages 263-97, December.
  25. Harberger, Arnold C, 1978. "On the Use of Distributional Weights in Social Cost-Benefit Analysis," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S87-120, April. [Downloadable!] (restricted)
Full references

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. Lundholm, Michael, 2005. "Cost-Benefit Analysis and the Marginal Cost of Public Funds," Research Papers in Economics 2005:3, Stockholm University, Department of Economics. [Downloadable!]
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