Public Provision of Private Goods and Nondistortionary Marginal Tax Rates: Some Further Results

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Public Provision of Private Goods and Nondistortionary Marginal Tax Rates: Some Further Results

Author Info

Vidar Christiansen and Luca Micheletto, Sören Blomquist, () (Uppsala Center for Fiscal Studies)

Abstract

The incidence and efficiency losses of taxes have usually been analyzed in isolation from public expenditures. This negligence of the expenditure side may imply a serious misperception of the effects of marginal tax rates. The reason is that part of the marginal tax may in fact be a payment for publicly provided goods and reflects a cost that the consumers should bear in order to face the proper incentives. Hence, part of the marginal tax may serve the same role as a market price in the sense that it conveys information about a real social cost of working more hours.

We develop this idea formally by studying an optimal income tax model in combination with a type of public provision scheme not analyzed before; the provision level is individualized and positively associated with the individual's labor supply. As examples we discuss child care, elderly care, primary education and health care. We show that there is a potential gain in efficiency where public provision of such services replaces market purchases. We also show that it is necessary for efficiency that, other things equal, marginal income tax rates are higher than in economies where the services are purchased in the market. This is because the optimal tax should be designed so as to face the taxpayers with the real cost of providing the services. Hence, it might very well be that economies with higher marginal tax rates have less severe distortions than economies with lower marginal tax rates.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2009:7.

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Length: 41 pages
Date of creation: 09 Oct 2009
Date of revision: 09 Oct 2009
Handle: RePEc:hhs:uufswp:2009_007

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
I38 - Health, Education, and Welfare - - Welfare and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-10-17 (All new papers)
NEP-PBE-2009-10-17 (Public Economics)
NEP-PUB-2009-10-17 (Public Finance)

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This page was last updated on 2009-11-30.

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