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Costs of taxation and the benefits of public goods : the role of income effects

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  • Martin, Will
  • Anderson, James E.

Abstract

The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify much lower measures of the marginal welfare cost of taxes and greater public good provision than indicated by traditional, compensated analyses. The authors confirm that this difference remains substantial with newer elasticity estimates, but show that either compensated or uncompensated measures of the marginal cost of funds can be used to evaluate the costs of taxation-and will provide the same result-as long as the income effects of both taxes and public good provision are incorporated in a consistent manner.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3700.

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Date of creation: 01 Sep 2005
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Handle: RePEc:wbk:wbrwps:3700

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Keywords: Environmental Economics&Policies; Economic Theory&Research; Public Sector Economics&Finance; Fiscal&Monetary Policy; Inequality;

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Cited by:
  1. Chris Jones, 2005. "Why the Marginal Social Cost of Funds is not the Shadow Value of Government Revenue," ANU Working Papers in Economics and Econometrics, Australian National University, College of Business and Economics, School of Economics 2005-449, Australian National University, College of Business and Economics, School of Economics.
  2. Lars Calmfors & Giancarlo Corsetti & Michael P. Devereux & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2008. "Chapter 4: Industrial policy," EEAG Report on the European Economy, CESifo Group Munich, CESifo Group Munich, vol. 0, pages 105-124, 02.

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