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Tax Structure and Government Behavior: Implications for Tax Policy

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Author Info
Roger H. Gordon
John D. Wilson

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Abstract

Changes in tax policy can affect all aspects of the economy. Not only do firms and individuals change behavior, creating efficiency costs, but government expenditure choices can also change. Unless these expenditure choices had been optimal' previously, changes in response to a tax reform affect welfare and should be taken into account when designing tax policy. This paper develops a specific model of government behavior and then explores the implications of government, as well as private, behavioral responses for tax policy. In particular, we assume that government officials favor expenditure (or regulatory) choices that increase the government's budget. As a result, higher tax rates on a particular activity encourage government behavior that aids the growth of this activity. This response enables tax policy to redirect government activity in desirable directions, but it also makes Pigovian taxes on negative externalities less effective.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7244.

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Date of creation: Jul 1999
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Handle: RePEc:nbr:nberwo:7244

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation

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References listed on IDEAS
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. Polinsky, A. Mitchell & Shavell, Steven, 1984. "The optimal use of fines and imprisonment," Journal of Public Economics, Elsevier, vol. 24(1), pages 89-99, June. [Downloadable!] (restricted)
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  2. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March. [Downloadable!] (restricted)
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  3. Lawrence H. Goulder & Ian W.H. Parry & Dallas Burtraw, 1997. "Revenue-Raising versus Other Approaches to Environmental Protection: The Critical Significance of Preexisting Tax Distortions," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 708-731, Winter. [Downloadable!] (restricted)
  4. Hoxby, Caroline M., 1999. "The productivity of schools and other local public goods producers," Journal of Public Economics, Elsevier, vol. 74(1), pages 1-30, October. [Downloadable!] (restricted)
  5. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June. [Downloadable!] (restricted)
  6. John Douglas Wilson & Roger H. Gordon, 2003. "Expenditure Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 399-417, 04. [Downloadable!] (restricted)
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  7. Glaeser, Edward L, 1996. " The Incentive Effects of Property Taxes on Local Governments," Public Choice, Springer, vol. 89(1-2), pages 93-111, October.
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Cited by:
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  1. Ben Zissimos & Myrna H. Wooders, 2006. "Relaxing Tax Competition through Public Good Differentiation," Working Papers 0601, Department of Economics, Vanderbilt University. [Downloadable!]
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  2. Susan Steiner, 2005. "Decentralisation and Poverty Reduction: A Conceptual Framework for the Economic Impact," Public Economics 0508006, EconWPA. [Downloadable!]
    Other versions:
  3. Lars-Erik Borge & Jørn Rattsø, 2006. "Property taxation as incentive for cost control:Empirical evidence for utility services in Norway," Working Paper Series 7606, Department of Economics, Norwegian University of Science and Technology. [Downloadable!]
    Other versions:
  4. Jørn Rattsø & Jon Hernes Fiva, 2005. "Decentralization with Property Taxation to Improve Incentives: Evidence from Local Governments’ Discrete Choice," Working Paper Series 5305, Department of Economics, Norwegian University of Science and Technology, revised 02 Sep 2005. [Downloadable!]
  5. Scott Gehlbach, 2003. "Taxability and Government Support of Business Activity: Testing Theories of Social-Contract Failure," Working Papers w0028, Center for Economic and Financial Research (CEFIR). [Downloadable!]
  6. Borge, Lars-Erik & Rattso, Jorn, 2003. "The Relationships Between Costs and User Charges: The Case of a Norwegian Utility Service," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Rainald Borck, 2002. "Stricter Enforcement May Increase Tax Evasion," Discussion Papers of DIW Berlin 297, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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  8. Wooders, Myrna & Zissimos, Ben, 2003. "Hotelling Tax Competition," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  9. Rajaraman, Indira & Vasishtha, Garima, 2000. "Impact of grants on tax effort of local government," Working Papers 00/1, National Institute of Public Finance and Policy. [Downloadable!]
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