Public Provision of Private Goods and Nondistortionary Marginal Tax Rates: Some Further Results
AbstractThe 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 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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Bibliographic InfoPaper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2009:13.
Length: 41 pages
Date of creation: 18 Sep 2009
Date of revision:
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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
More information through EDIRC
Nonlinear income taxation; Marginal income tax rates; Public provision of private goods; In-kind transfers;
Other versions of this item:
- Vidar Christiansen and Luca Micheletto, Sören Blomquist,, 2009. "Public Provision of Private Goods and Nondistortionary Marginal Tax Rates: Some Further Results," Working Paper Series, Center for Fiscal Studies 2009:7, Uppsala University, Department of Economics, revised 09 Oct 2009.
- 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, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-26 (All new papers)
- NEP-MIC-2009-09-26 (Microeconomics)
- NEP-PBE-2009-09-26 (Public Economics)
- NEP-PUB-2009-09-26 (Public Finance)
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