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Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods

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  • James E. Anderson

    () (Boston College)

  • Will Martin

    (World Bank)

Abstract

The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify greater public good provision than indicated by traditional, compensated analyses. We develop a model including multiple public goods and taxes and derive consistent measures of the marginal benefit of public goods and their marginal social cost inclusive of tax distortions using both compensated and uncompensated measures of the Marginal Cost of Funds (MCF). Our analysis confirms that the desirability of tax financed public projects is independent of whether compensated or uncompensated methods are used. The main innovation shows that the costs or benefits of providing particular public goods should be adjusted by a simple, benefit multiplier not previously seen in the literature if an uncompensated MCF is used.

Suggested Citation

  • James E. Anderson & Will Martin, 2010. "Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods," Boston College Working Papers in Economics 731, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:731
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    References listed on IDEAS

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    Cited by:

    1. Martin, Will, 2017. "Trade and economic impacts of destination-based corporate taxes," IFPRI discussion papers 1606, International Food Policy Research Institute (IFPRI).
    2. Alberto Pench, 2015. "Welfare Analysis of Tax and Expenditure Reform," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(3), pages 391-400, November.

    More about this item

    Keywords

    fiscal policy; second best; public goods; distortions; costs of taxation; marginal cost of funds; marginal excess burden; thought experiment;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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