Advanced Search
MyIDEAS: Login to save this paper or follow this series

Costs of taxation and benefits of public goods with multiple taxes and goods

Contents:

Author Info

  • Anderson, James E.
  • Martin, Will

Abstract

The recent public economics literature involves an apparent consensus that income effects reduce the costs of raising revenues and hence increase the desirable level of public good provision. Higher taxes can indeed reduce the demand for leisure -- and hence increase the supply of taxed labor -- through income effects. However, the consensus is wrong because the income effects of taxes must be considered symmetrically with those from provision of public goods. This paper uses a model with multiple public goods and taxes to derive consistent measures of the marginal benefits of publicly-provided goods and their marginal social costs. With this model, the authors show that either compensated approaches excluding these income effects or uncompensated approaches including them may be used. If an uncompensated measure of the marginal cost of funds is used, however, the benefits of providing public goods should be adjusted with a simple, benefit multiplier not previously seen in the literature. Once this is done, the optimal level of public provision is independent of whether compensated or uncompensated approaches are used. Proper accounting for these income effects -- or their omission using a compensated approach -- appears to substantially raise the hurdle for government provision where there are substantial taxes bearing on labor.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2010/09/01/000158349_20100901082448/Rendered/PDF/WPS5410.pdf
Download Restriction: no

Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5410.

as in new window
Length:
Date of creation: 01 Sep 2010
Date of revision:
Handle: RePEc:wbk:wbrwps:5410

Contact details of provider:
Postal: 1818 H Street, N.W., Washington, DC 20433
Phone: (202) 477-1234
Email:
Web page: http://www.worldbank.org/
More information through EDIRC

Related research

Keywords: Economic Theory&Research; Public Sector Economics; Debt Markets; Emerging Markets; Taxation&Subsidies;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(2), pages 283-98, April.
  2. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
  3. Auriol, Emmanuelle & Warlters, Michael, 2007. "The Marginal Cost of Public Funds in Developing Countries: An Application to 38 African Countries," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 371, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Joel Slemrod & Shlomo Yitzhaki, 2001. "Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects," NBER Working Papers 8196, National Bureau of Economic Research, Inc.
  5. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
  6. Liqun Liu, 2004. "The Marginal Cost of Funds and the Shadow Prices of Public Sector Inputs and Outputs," International Tax and Public Finance, Springer, Springer, vol. 11(1), pages 17-29, January.
  7. Fullerton, Don, 1991. "Reconciling Recent Estimates of the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 81(1), pages 302-08, March.
  8. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, Elsevier, vol. 70(3), pages 365-382, December.
  9. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
  10. Wildasin, David E., 1979. "Public good provision with optimal and non-optimal commodity taxation : The single-consumer case," Economics Letters, Elsevier, Elsevier, vol. 4(1), pages 59-64.
  11. Creedy, J., 1997. "Measuring Welfare Changes and the Excess Burden of Taxation," Department of Economics - Working Papers Series, The University of Melbourne 587, The University of Melbourne.
  12. Joseph E. Stiglitz & Partha Dasgupta, 1970. "Differential Taxation, Public Goods, and Economic Efficiency," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 299, Cowles Foundation for Research in Economics, Yale University.
  13. Neary, J Peter, 1989. "Trade Liberalization and Shadow Prices in the Presence of Tariffs and Quotas," CEPR Discussion Papers, C.E.P.R. Discussion Papers 345, C.E.P.R. Discussion Papers.
  14. Triest, Robert K, 1990. "The Relationship between the Marginal Cost of Public Funds and Marginal Excess Burden," American Economic Review, American Economic Association, American Economic Association, vol. 80(3), pages 557-66, June.
  15. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 11-23, March.
  16. James E. Anderson & Will Martin, 1996. "The Welfare Analysis of Fiscal Policy: A Simple Unified Account," Boston College Working Papers in Economics, Boston College Department of Economics 316., Boston College Department of Economics.
  17. Deardorff, A.V. & Courant, P.N., 1989. "On The Likelihood Of Factor Price Equalization With Nontraded Goods," Working Papers, Research Seminar in International Economics, University of Michigan 241, Research Seminar in International Economics, University of Michigan.
  18. Anderson, James E & Neary, J Peter, 1992. "Trade Reform with Quotas, Partial Rent Retention, and Tariffs," Econometrica, Econometric Society, Econometric Society, vol. 60(1), pages 57-76, January.
  19. Browning, Edgar K & Gronberg, Timothy & Liu, Liqun, 2000. "Alternative Measures of the Marginal Cost of Funds," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 38(4), pages 591-99, October.
  20. Kleven, Henrik & Kreiner, Claus Thustrup, 2006. "The Marginal Cost of Public Funds: Hours of Work versus Labor Force Participation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5594, C.E.P.R. Discussion Papers.
  21. Alan J. Auerbach, 1982. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc.
  22. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, Elsevier, vol. 67(1), pages 105-122, January.
  23. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262042509, December.
  24. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, American Economic Association, vol. 61(3), pages 261-78, June.
  25. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, Elsevier, vol. 61(2), pages 289-305, August.
  26. Devarajan, Shantayanan & Squire, Lyn & Suthiwart-Narueput, Sethaput, 1997. "Beyond Rate of Return: Reorienting Project Appraisal," World Bank Research Observer, World Bank Group, World Bank Group, vol. 12(1), pages 35-46, February.
  27. Martin Feldstein, 1993. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act," NBER Working Papers 4496, National Bureau of Economic Research, Inc.
  28. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(1), pages 119-28, January.
  29. Charles L. Ballard & Don Fullerton, 1993. "Distortionary Taxes and the Provision of Public Goods," NBER Working Papers 3506, National Bureau of Economic Research, Inc.
  30. Squire, Lyn, 1989. "Project evaluation in theory and practice," Handbook of Development Economics, Elsevier, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 21, pages 1093-1137 Elsevier.
  31. Christiansen, Vidar, 2007. "Two Approaches to Determine Public Good Provision under Distortionary Taxation," National Tax Journal, National Tax Association, vol. 60(1), pages 25-43, March.
  32. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  33. Michael Keen & David Wildasin, 2004. "Pareto-Efficient International Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 94(1), pages 259-275, March.
  34. Mayshar, Joram, 1991. "On Measuring the Marginal Cost of Funds Analytically," American Economic Review, American Economic Association, American Economic Association, vol. 81(5), pages 1329-35, December.
  35. Ravallion, Martin, 2008. "Evaluating Anti-Poverty Programs," Handbook of Development Economics, Elsevier, Elsevier.
  36. Louis Kaplow, 2004. "On the (Ir)Relevance of Distribution and Labor Supply Distortion to Government Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 18(4), pages 159-175, Fall.
  37. Ballard, Charles L., 1990. "Marginal welfare cost calculations : Differential analysis vs. balanced-budget analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 41(2), pages 263-276, March.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:5410. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.