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Distortionary Taxes and the Provision of Public Goods

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Author Info
Charles L. Ballard
Don Fullerton

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Abstract

When comparing marginal costs and benefits of a public project, most economists think in terms of adding together the marginal costs of production plus marginal costs of additional distortionary taxation. This paper clarifies how the "revenue effect" offsets the "distortionary effect." For Cobb-Douglas utility with a marginal increase in a proportional wage tax, they exactly offset each other and the Samuelson rule is unaffected. Also, with a preexisting wage tax, an incremental lump-sum tax has only this "revenue effect:" it increases labor supply, increases tax revenue from the preexisting wage tax, and thus makes the project easier to fund. In our numerical example, the incremental lump-sum tax costs taxpayers only $.77 per dollar raised.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3506.

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Date of creation: Oct 1993
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Publication status: published as Journal of Economic Perspectives, Vol. 6, No. 3, pp. 117-131 (Summer 1992).
Handle: RePEc:nbr:nberwo:3506

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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. 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)
  2. Kay, J. A., 1980. "The deadweight loss from a tax system," Journal of Public Economics, Elsevier, vol. 13(1), pages 111-119, February. [Downloadable!] (restricted)
  3. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March. [Downloadable!] (restricted)
  4. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Oxford University Press, vol. 22(2), pages 227-43, April.
  5. Wildasin, David E., 1979. "Public good provision with optimal and non-optimal commodity taxation : The single-consumer case," Economics Letters, Elsevier, vol. 4(1), pages 59-64. [Downloadable!] (restricted)
  6. Ahmed, S. & Croushore. D.D., 1988. "Substitution Effects And The Marginal Welfare Cost Of Taxation," Papers 5-88-4, Pennsylvania State - Department of Economics.
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  7. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March. [Downloadable!] (restricted)
  8. Stiglitz, Joseph E & Dasgupta, P, 1971. "Differential Taxation, Public Goods and Economic Efficiency," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 151-74, April. [Downloadable!] (restricted)
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  9. Ballard, Charles L., 1990. "Marginal welfare cost calculations : Differential analysis vs. balanced-budget analysis," Journal of Public Economics, Elsevier, vol. 41(2), pages 263-276, March. [Downloadable!] (restricted)
  10. Don Fullerton, 1991. "If Labor is Inelastic, Are Taxes Still Distorting?," NBER Working Papers 2810, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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