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The Optimal Supply of Public Goods and the Distortionary Cost of Taxation: Comment

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  • Browning, Edgar K.
  • Liu, Liqun

Abstract

Louis Kaplow argues in his recent paper that there are a wide variety of situations in which the income tax financing of a public good is nondistortionary. Specifically, this occurs when the additional tax liability of each person equals that person's additional benefit from the public good. We show that the income tax does distort in exactly the cases where Kaplow argues that there is no distortion, at least in the conventional sense of the term "distort." Specifically, we show that taxpayers will be better off, and will prefer a larger quantity of the public good, if lump sum taxes are used to finance the public good rather than an increase in the income tax rate. This conclusion holds for all the specifications (regarding the nature of the public good) discussed by Kaplow.

Suggested Citation

  • Browning, Edgar K. & Liu, Liqun, 1998. "The Optimal Supply of Public Goods and the Distortionary Cost of Taxation: Comment," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(1), pages 103-116, March.
  • Handle: RePEc:ntj:journl:v:51:y:1998:i:1:p:103-16
    DOI: 10.1086/NTJ41789315
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    Cited by:

    1. Dan Usher, 2006. "The Marginal Cost of Public Funds Is the Ratio of Mean Income to Median Income," Public Finance Review, , vol. 34(6), pages 687-711, November.
    2. Liqun Liu, 2006. "Combining Distributional Weights and the Marginal Cost of Funds," Public Finance Review, , vol. 34(1), pages 60-79, January.
    3. Kaplow, Louis, 1998. "A Note on the Optimal Supply of Public Goods and the Distortionary Cost of Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(1), pages 117-125, March.
    4. Bjart Holtsmark, 2019. "Is the marginal cost of public funds equal to one?," Discussion Papers 893, Statistics Norway, Research Department.

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