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The optimal composition of government expenditure among transfers, education and public goods

  • John Creedy

    ()

    (University of Melbourne)

  • Solamz Moslehi

    ()

    (University of Melbourne)

This paper examines the optimal allocation of tax revenue among a universal transfer payment, a pure public good and expenditure on education. Using a single-period framework, education expenditure raises the productivity of individuals via a human capital production function. The social welfare function is based on individuals’ (indirect) utilities. Education creates a substantial fiscal spillover whereby the increase in human capital gives rise to higher labour earnings and thus higher income tax revenue, thereby allowing greater government expenditure on all items than would otherwise be possible. A higher inequality of exogenous ability levels is found to increase all types of expenditure, but only the transfer increases in relative terms. Higher inequality aversion leads to an increase in transfer payments in absolute and relative terms, at the expense of the other two components. However, there is little sensitivity to inequality aversion. An increase in the elasticity of the wage with respect to basic ability leads to lower education spending.

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Article provided by IEF in its journal Hacienda Pública Española/Revista de Economía Pública.

Volume (Year): 194 (2010)
Issue (Month): 3 (June)
Pages: 41-64

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Handle: RePEc:hpe:journl:y:2010:v:194:i:3:p:41-64
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  1. William F. Blankenau & Nicole B. Simpson & Marc Tomljanovich, 2007. "Public Education Expenditures, Taxation, and Growth: Linking Data to Theory," American Economic Review, American Economic Association, vol. 97(2), pages 393-397, May.
  2. Capolupo, Rosa, 2000. "Output Taxation, Human Capital and Growth," Manchester School, University of Manchester, vol. 68(2), pages 166-83, March.
  3. John Creedy & Solmaz Moslehi, 2007. "Modelling the Composition of Government Expenditure in Democracies," Department of Economics - Working Papers Series 1007, The University of Melbourne.
  4. Rainald Borck, 2005. "Voting, Inequality, and Redistribution," Discussion Papers of DIW Berlin 503, DIW Berlin, German Institute for Economic Research.
  5. Konstantinos Angelopoulos & Jim Malley & Apostolis Philippopoulos, 2007. "Public Education Expenditure, Growth and Welfare," Working Papers 2007_09, Business School - Economics, University of Glasgow.
  6. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
  7. Thomas S. McCaleb, 1985. "Public Choice Perspectives on the Flat Tax Follies," Cato Journal, Cato Journal, Cato Institute, vol. 5(2), pages 613-628, Fall.
  8. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
  9. Tridimas, George, 2001. " The Economics and Politics of the Structure of Public Expenditure," Public Choice, Springer, vol. 106(3-4), pages 299-316, March.
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