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The Optimal Size of Public Spending and the Distortionary Cost of Taxation

  • Ng, Yew-Kwang

Feldstein (1997) reviews contributions in distortionary costs of taxation, estimating that the cost per incremental dollar of government spending is $2.65. Kaplow (1996) favors the supply of a public good whenever the benefit/cost ratio exceeds one, contrary to the orthodox position that has existed since Pigou (1928). This paper largely reconciles these two opposing positions. The large distortionary costs exist on the revenue side, but are largely offset by the negative distortionary costs on the spending side or by the distributional gain. Kaplow’s and Feldstein’s arguments have to be subject to important qualifications. Additional arguments relevant to "How big should the public spending be?" are also reviewed. Environmental disruption effects, burden-free taxes on diamond goods, and relative-income effects all favor more public spending.

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Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 53 (2000)
Issue (Month): n. 2 (June)
Pages: 253-72

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Handle: RePEc:ntj:journl:v:53:y:2000:i:n._2:p:253-72
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  1. Ng, Yew-Kwang, 1987. "Relative-Income Effects and the Appropriate Level of Public Expenditure," Oxford Economic Papers, Oxford University Press, vol. 39(2), pages 293-300, June.
  2. Ng, Yew-Kwang & Wang, Jianguo, 1993. "Relative income, aspiration, environmental quality, individual and political myopia : Why may the rat-race for material growth be welfare-reducing?," Mathematical Social Sciences, Elsevier, vol. 26(1), pages 3-23, July.
  3. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
  4. Yew-Kwang Ng & Guang-Zhen Sun, 2006. "Introduction," Division of Labor & Transaction Costs (DLTC), World Scientific Publishing Co. Pte. Ltd., vol. 1(02), pages 99-103.
  5. Ng, Yew-Kwang, 1987. "Diamonds Are a Government's Best Friend: Burden-Free Taxes on Goods Valued for Their Values," American Economic Review, American Economic Association, vol. 77(1), pages 186-91, March.
  6. Ng, Yew-Kwang, 1977. "Towards a Theory of Third-Best," Public Finance = Finances publiques, , vol. 32(1), pages 1-15.
  7. Ng, Yew-Kwang, 1975. "Non-Economic Activities, Indirect Externalities, and Third-Best Politics," Kyklos, Wiley Blackwell, vol. 28(3), pages 507-25.
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