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Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects

  • Will Martin

    ()

    (World Bank)

  • James E. Anderson

    ()

    (Boston College)

The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify very much lower measures of the marginal welfare cost of taxes and greater public good provision than indicated by traditional, compensated analyses. We confirm that this difference remains substantial with newer elasticity estimates, but show that either compensated or uncompensated measures of the marginal cost of funds can be used to evaluate the costs of taxation– and will provide the same result– as long as the income effects of both taxes and public good provision are incorporated in a consistent manner.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 617.

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Length: 27 pages
Date of creation: 08 Sep 2005
Date of revision:
Handle: RePEc:boc:bocoec:617
Contact details of provider: Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
Fax: +1-617-552-2308
Web page: http://fmwww.bc.edu/EC/
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