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The Optimal Treatment of Tax Expenditures

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Author Info
Emmanuel Saez

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Abstract

This paper analyzes the optimal treatment of tax expenditures. It develops an optimal tax model where individuals derive utility from spending on a contribution' good such as charitable giving. The contribution good has also a public good effect on all individuals in the economy. The government imposes linear taxes on earnings and on the contribution good so as to maximize welfare. The government may also finance directly the contribution good out of tax revenue. Optimal tax and subsidy rates on earnings and the contribution good are expressed in terms of empirically estimable parameters and the redistributive tastes of the government. The optimal subsidy on the contribution good is increasing in the size of the price elasticity of contributions, the size of the crowding-out effect of public contributions on private contributions, and the size of the public good effect of the contribution good. Numerical simulations show that the optimal subsidy on contributions is fairly sensitive to the size of these parameters but that, in most cases, it should be lower than the earnings tax rate.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8037.

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Date of creation: Dec 2000
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Handle: RePEc:nbr:nberwo:8037

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

References listed on IDEAS
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  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. Harvey S. Rosen, 1985. "Housing Subsidies: Effects on Housing Decisions, Efficiency, and Equity," NBER Working Papers 1161, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier. [Downloadable!] (restricted)
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Cited by:
(explanations, 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. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Jon Bakija & Bradley Heim, 2008. "How Does Charitable Giving Respond to Incentives and Income? Dynamic Panel Estimates Accounting for Predictable Changes in Taxation," NBER Working Papers 14237, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Alan Krause, . "Taxing and Subsidising Charitable Contributions," Discussion Papers 09/23, Department of Economics, University of York. [Downloadable!]
  4. Jane K. Dokko, 2008. "Does the NEA crowd out private charitable contributions to the arts?," Finance and Economics Discussion Series 2008-10, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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