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Status Effects, Public Goods Provision, and the Excess Burden

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Author Info
Wendner, Ronald
Goulder, Lawrence H.

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Abstract

Most studies of the optimal provision of public goods or the excess burden from taxation assume that individual utility is independent of other individuals' consumption. This paper investigates public good provision and excess burden in a model that allows for interdependence in consumption in the form of status (relative consumption) effects. In the presence of such effects, consumption and labor taxes no longer are pure distortionary taxes but have a corrective tax element that addresses an externality from consumption. As a result, the marginal excess burden of consumption taxes is lower than in the absence of status effects, and will be negative if the consumption tax rate is below the "Pigouvian" rate. Correspondingly, when consumption or labor tax rates are below the Pigouvian rate, the second-best level of public goods provision is above the first-best level, contrary to findings from models without status effects. For plausible functional forms and parameters relating to status effects, the marginal excess burden from existing U.S. labor taxes is substantially lower than in most prior studies, and is negative in some cases.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8260.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:8260

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Keywords: status effects excess burden deadweight loss public goods provision corrective taxation consumption externality first best second best

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Find related papers by JEL classification:
D62 - Microeconomics - - Welfare Economics - - - Externalities
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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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. Wendner, Ronald, 2008. "Consumption Externalities and Pigouvian Ranking -- A Generalized Cobb-Douglas Example," MPRA Paper 8540, University Library of Munich, Germany. [Downloadable!]
  2. Aronsson, Thomas, 2007. "When the Joneses’ Consumption Hurts: Optimal Income Taxation and Public Good Provision in an OLG Model," UmeÃ¥ Economic Studies 711, Umeå University, Department of Economics. [Downloadable!]
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