The Policy Elasticity
AbstractThis paper provides a generic framework for evaluating the welfare impact of government policy changes towards taxes, transfers, and publicly provided goods. The results show that the behavioral response required for welfare measurement is the causal impact of each agent’s response to the policy on the government’s budget. A decomposition of this response into income and substitution effects is not required. Because these desired elasticities vary with the policy in question, I term them policy elasticities. I also provide an additivity condition that yields a natural definition of the marginal costs of public funds as welfare impact of a policy per dollar of its cost to the government budget. Finally, I use the model, along with causal estimates from existing literature, to study the welfare impact of additional redistribution by increasing the generosity of the earned income tax credit financed by an increase in the top marginal income tax rate. I show existing causal estimates suggest additional redistribution is desirable if and only if providing an additional $0.44 to an EITC-eligible single mother (earning less than $40,000) is preferred to providing an additional $1 to a person subject to the top marginal tax rate (earning more than $400,000).
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19177.
Date of creation: Jun 2013
Date of revision:
Note: DEV HC HE LS PE
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Find related papers by JEL classification:
- D6 - Microeconomics - - Welfare Economics
- H0 - Public Economics - - General
- I3 - Health, Education, and Welfare - - Welfare and Poverty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-05 (All new papers)
- NEP-PBE-2013-07-05 (Public Economics)
- NEP-REG-2013-07-05 (Regulation)
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.:
- Nada Eissa & Hilary Hoynes, 2008.
"Redistribution and Tax Expenditures: The Earned Income Tax Credit,"
NBER Working Papers
14307, National Bureau of Economic Research, Inc.
- Nada Eissa & Hilary Hoynes, 2011. "Redistribution and Tax Expenditures: The Earned Income Tax Credit," NBER Chapters, in: Economic Analysis of Tax Expenditures National Bureau of Economic Research, Inc.
- Eissa, Nada & Hoynes, Hilary, 2011. "Redistribution And Tax Expenditures: The Earned Income Tax Credit," National Tax Journal, National Tax Association, vol. 64(2), pages 689-729, June Cita.
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