IDEAS home Printed from https://ideas.repec.org/a/bla/jpbect/v13y2011i2p289-309.html
   My bibliography  Save this article

Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods

Author

Listed:
  • JAMES E. ANDERSON
  • WILL MARTIN

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • James E. Anderson & Will Martin, 2011. "Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(2), pages 289-309, April.
  • Handle: RePEc:bla:jpbect:v:13:y:2011:i:2:p:289-309
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Deardorff, Alan V & Courant, Paul N, 1990. "On the Likelihood of Factor Price Equalization with Nontraded Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 589-596, August.
    2. Slemrod, Joel & Yitzhaki, Shlomo, 2001. "Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(2), pages 189-202, June.
    3. J. E. Stiglitz & P. Dasgupta, 1971. "Differential Taxation, Public Goods, and Economic Efficiency," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 151-174.
    4. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
    5. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Western Economic Association International, vol. 22(2), pages 227-243, April.
    6. Squire, Lyn, 1989. "Project evaluation in theory and practice," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 21, pages 1093-1137, Elsevier.
    7. Neary, J Peter, 1995. "Trade Liberalisation and Shadow Prices in the Presence of Tariffs and Quotas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 531-554, August.
    8. Anderson, James E & Neary, J Peter, 1992. "Trade Reform with Quotas, Partial Rent Retention, and Tariffs," Econometrica, Econometric Society, vol. 60(1), pages 57-76, January.
    9. Creedy, John, 2000. "Measuring Welfare Changes and the Excess Burden of Taxation," Bulletin of Economic Research, Wiley Blackwell, vol. 52(1), pages 1-47, January.
    10. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2006. "The marginal cost of public funds: Hours of work versus labor force participation," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1955-1973, November.
    11. Wildasin, David E., 1979. "Public good provision with optimal and non-optimal commodity taxation : The single-consumer case," Economics Letters, Elsevier, vol. 4(1), pages 59-64.
    12. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-298, April.
    13. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
    14. Dreze, Jean & Stern, Nicholas, 1987. "The theory of cost-benefit analysis," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 14, pages 909-989, Elsevier.
    15. Ballard, Charles L., 1990. "Marginal welfare cost calculations : Differential analysis vs. balanced-budget analysis," Journal of Public Economics, Elsevier, vol. 41(2), pages 263-276, March.
    16. Ravallion, Martin, 2008. "Evaluating Anti-Poverty Programs," Handbook of Development Economics, in: T. Paul Schultz & John A. Strauss (ed.), Handbook of Development Economics, edition 1, volume 4, chapter 59, pages 3787-3846, Elsevier.
    17. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.
    18. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
    19. Tatsuo Hatta, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Oxford University Press, vol. 44(1), pages 1-21.
    20. A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 119-128.
    21. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
    22. Fullerton, Don, 1991. "Reconciling Recent Estimates of the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 302-308, March.
    23. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, December.
    24. Louis Kaplow, 2004. "On the (Ir)Relevence of Distribution and Labor Supply Distortion of Government Policy," NBER Working Papers 10490, National Bureau of Economic Research, Inc.
    25. Christiansen, Vidar, 2007. "Two Approaches to Determine Public Good Provision Under Distortionary Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(1), pages 25-43, March.
    26. Devarajan, Shantayanan & Squire, Lyn & Suthiwart-Narueput, Sethaput, 1997. "Beyond Rate of Return: Reorienting Project Appraisal," The World Bank Research Observer, World Bank Group, vol. 12(1), pages 35-46, February.
    27. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127, Elsevier.
    28. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, December.
    29. Triest, Robert K, 1990. "The Relationship between the Marginal Cost of Public Funds and Marginal Excess Burden," American Economic Review, American Economic Association, vol. 80(3), pages 557-566, June.
    30. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
    31. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, vol. 61(2), pages 289-305, August.
    32. Browning, Edgar K & Gronberg, Timothy & Liu, Liqun, 2000. "Alternative Measures of the Marginal Cost of Funds," Economic Inquiry, Western Economic Association International, vol. 38(4), pages 591-599, October.
    33. Louis Kaplow, 2004. "On the (Ir)Relevance of Distribution and Labor Supply Distortion to Government Policy," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 159-175, Fall.
    34. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
    35. James E. Anderson & Will Martin, 1996. "The Welfare Analysis of Fiscal Policy: A Simple Unified Account," Boston College Working Papers in Economics 316., Boston College Department of Economics.
    36. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    37. Mayshar, Joram, 1991. "On Measuring the Marginal Cost of Funds Analytically," American Economic Review, American Economic Association, vol. 81(5), pages 1329-1335, December.
    38. Auriol, Emmanuelle & Warlters, Michael, 2006. "The Marginal Cost of Public Funds in Developing Countries: An Application to 38 African Countries," CEPR Discussion Papers 6007, C.E.P.R. Discussion Papers.
    39. Michael Keen & David Wildasin, 2004. "Pareto-Efficient International Taxation," American Economic Review, American Economic Association, vol. 94(1), pages 259-275, March.
    40. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 67(1), pages 105-122, January.
    41. Liqun Liu, 2004. "The Marginal Cost of Funds and the Shadow Prices of Public Sector Inputs and Outputs," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 17-29, January.
    42. Jones, Chris, 2005. "Applied Welfare Economics," OUP Catalogue, Oxford University Press, number 9780199281978, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Martin, Will, 2017. "Trade and economic impacts of destination-based corporate taxes," IFPRI discussion papers 1606, International Food Policy Research Institute (IFPRI).
    2. Alberto Pench, 2015. "Welfare Analysis of Tax and Expenditure Reform," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(3), pages 391-400, November.
    3. Gnangnon, Sèna Kimm, 2021. "Effect of Development Aid on Productive Capacities," EconStor Preprints 233973, ZBW - Leibniz Information Centre for Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Will Martin & James E. Anderson, 2005. "Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects," Boston College Working Papers in Economics 617, Boston College Department of Economics.
    2. 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 2005-449, Australian National University, College of Business and Economics, School of Economics.
    3. Liqun Liu, 2006. "Combining Distributional Weights and the Marginal Cost of Funds," Public Finance Review, , vol. 34(1), pages 60-79, January.
    4. Bas Jacobs, 2018. "The marginal cost of public funds is one at the optimal tax system," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 883-912, August.
    5. Åsmund Sunde Valseth & Katinka Holtsmark & Bjart Holtsmark, 2019. "The costs of taxation in the presence of inequality," Discussion Papers 908, Statistics Norway, Research Department.
    6. Ming Chung Chang & Shufen Wu, 2011. "Should Marginal Cost of Public Funds include the Revenue Effect?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(I), pages 1-16, March.
    7. Parry, Ian W.H., 1999. "Tax Deductions, Consumption Distortions, and the Marginal Excess Burden of Taxation," Discussion Papers 10801, Resources for the Future.
    8. Liqun Liu, 2004. "The Marginal Cost of Funds and the Shadow Prices of Public Sector Inputs and Outputs," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 17-29, January.
    9. Ian Parry, 2002. "Tax Deductions and the Marginal Welfare Cost of Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(5), pages 531-552, September.
    10. Mickaël Beaud & Thierry Blayac & Patrice Bougette & Soufiane Khoudmi & Philippe Mahenc & Stéphane Mussard, 2013. "Estimation du coût d'opportunité des fonds publics pour l'économie française," Working Papers halshs-01077141, HAL.
    11. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2004. "A Generalized Approach to Multigeneration Project Evaluation," Southern Economic Journal, John Wiley & Sons, vol. 71(2), pages 377-396, October.
    12. Claus Thustrup Kreiner & Nicolaj Verdelin, 2008. "Optimal Provision of Public Goods: A Synthesis," EPRU Working Paper Series 08-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    13. Bjart Holtsmark, 2019. "Is the marginal cost of public funds equal to one?," Discussion Papers 893, Statistics Norway, Research Department.
    14. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2006. "The marginal cost of public funds: Hours of work versus labor force participation," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1955-1973, November.
    15. José Manuel González-Páramo, "undated". "Midiendo El Coste Marginal En Bienestar De Una Reforma Impositiva," Working Papers 32-02 Classification-JEL , Instituto de Estudios Fiscales.
    16. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
    17. Kaplow, Louis, 2006. "Public goods and the distribution of income," European Economic Review, Elsevier, vol. 50(7), pages 1627-1660, October.
    18. Claus Thustrup Kreiner & Nicolaj Verdelin, 2012. "Optimal Provision of Public Goods: A Synthesis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 384-408, June.
    19. Shun-ichiro Bessho & Masayoshi Hayashi, 2013. "Estimating the Social Marginal Cost of Public Funds," Public Finance Review, , vol. 41(3), pages 360-385, May.
    20. Bas Jacobs, 2010. "The Marginal Cost of Public Funds is One," CESifo Working Paper Series 3250, CESifo.

    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jpbect:v:13:y:2011:i:2:p:289-309. 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: . General contact details of provider: https://edirc.repec.org/data/apettea.html .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/apettea.html .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.