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The Welfare Analysis of Fiscal Policy: A Simple Unified Account

Author

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  • James E. Anderson

    () (Boston College)

  • Will Martin

    (World Bank)

Abstract

A simple general equilibrium model of an economy with distortionary taxes and public goods is used to extend, unify and clean up the welfare analysis of changes in taxation, redistribution and the provision of public goods. We clarify the distinction between compensation and money metric measures of the welfare impact of fiscal changes and show that the equivalent variation measure dominates other measures. We provide an integrated approach to marginal tax and public good changes when public goods have real resource costs and must be financed by distortionary taxation using the concepts of the marginal cost of funds, the fiscal price of public goods and the virtual price of public goods. Here too, the compensation version of these concepts dominates the money metric version.

Suggested Citation

  • 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.
  • Handle: RePEc:boc:bocoec:316
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    File URL: http://fmwww.bc.edu/EC-P/wp316.pdf
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    References listed on IDEAS

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    7. McKenzie,George W., 1983. "Measuring Economic Welfare," Cambridge Books, Cambridge University Press, number 9780521248624.
    8. 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.
    9. Mayshar, Joram, 1990. "On measures of excess burden and their application," Journal of Public Economics, Elsevier, vol. 43(3), pages 263-289, December.
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    11. 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.
    12. 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.
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    Citations

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    Cited by:

    1. Alam, Mohammad Jahangir & Buysse, Jeroen & Begum, Ismat Ara & Nolte, Stephan & Wailes, Eric J. & Van Huylenbroeck, Guido, 2012. "Impact of Trade Liberalization and World Price Changes in Bangladesh: A Computable General Equilibrium Analysis," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 123724, International Association of Agricultural Economists.
    2. John C. Beghin & Jean-Christophe Bureau & Sung Joon Park, 2003. "Food Security and Agricultural Protection in South Korea," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 618-632.
    3. Anderson, James E. & Martin, Will, 1998. "Evaluating public expenditures when governments must rely on distortionary taxation," Policy Research Working Paper Series 1981, The World Bank.
    4. Beghin, John C. & Bureau, Jean-Christophe & Park, Sung Joon, 2002. "The Cost of Food Self-Sufficiency and Agricultural Protection in South Korea," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24879, European Association of Agricultural Economists.
    5. Maria Cipollina & Luca Salvatici, 2008. "Measuring Protection: Mission Impossible?," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 577-616, July.
    6. 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.
    7. Emiko Fukase & Will Martin, 2000. "The effects of the United States granting MFN status to Vietnam," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 136(3), pages 539-559, September.
    8. Bach, Christian F. & Martin, Will, 2001. "Would the right tariff aggregator for policy analysis please stand up?," Journal of Policy Modeling, Elsevier, vol. 23(6), pages 621-635, August.
    9. James E. Anderson, 1996. "Trade Reform with a Government Budget Constraint," NBER Working Papers 5827, National Bureau of Economic Research, Inc.
    10. Can Erbil, 2004. "Trade Taxes Are Expensive," International Trade 0409002, EconWPA.
    11. 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.
    12. Fukase, Emiko & Martin, Will, 1999. "The effect of the United States'granting Most Favored Nation status to Vietnam," Policy Research Working Paper Series 2219, The World Bank.

    More about this item

    Keywords

    Marginal cost of funds; fiscal price; virtual price; duality;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H40 - Public Economics - - Publicly Provided Goods - - - General

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