Public Goods, Labor Supply and the Source of Economic Distortions
According to the conventional public finance literature any tax instrument other than the lump-sum tax is inherently distortionary because it alters relative prices. This paper revisits the case of the labor income tax and shows that its supposedly distortionary effects are the result of a stringent assumption about labor supply behavior. The conventional time allocation model generally assumes that taxpayers disregard the marginal benefits of taxation, received in the form of additional public goods, in their labor supply responses to the labor income tax. In line with previous literature stressing the importance of government spending for labor supply behavior, this paper generalizes the traditional model by describing the behavior of taxpayers that consider both the marginal costs and the marginal benefits of the labor income tax. Under these less stringent assumptions the paper derives an efficient (undistorted) solution to the public goods problem, where taxpayers contribute to the public goods in accordance to their individual marginal benefits while the relative value of leisure remains equal to the pre-tax wage rate.
|Date of creation:||05 Nov 2010|
|Date of revision:|
|Contact details of provider:|| Phone: 404-413-0235|
Web page: http://aysps.gsu.edu/isp/index.html
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.:
- Blundell, Richard & Macurdy, Thomas, 1999.
"Labor supply: A review of alternative approaches,"
Handbook of Labor Economics,
in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695
- Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
When requesting a correction, please mention this item's handle: RePEc:ays:ispwps:paper1105. 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: (Paul Benson)
If references are entirely missing, you can add them using this form.