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Distortionary Taxes and the Provision of Public Goods

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  • Charles L. Ballard
  • Don Fullerton

Abstract

When comparing marginal costs and benefits of a public project, most economists think in terms of adding together the marginal costs of production plus marginal costs of additional distortionary taxation. This paper clarifies how the "revenue effect" offsets the "distortionary effect." For Cobb-Douglas utility with a marginal increase in a proportional wage tax, they exactly offset each other and the Samuelson rule is unaffected. Also, with a preexisting wage tax, an incremental lump-sum tax has only this "revenue effect:" it increases labor supply, increases tax revenue from the preexisting wage tax, and thus makes the project easier to fund. In our numerical example, the incremental lump-sum tax costs taxpayers only $.77 per dollar raised.

Suggested Citation

  • Charles L. Ballard & Don Fullerton, 1990. "Distortionary Taxes and the Provision of Public Goods," NBER Working Papers 3506, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3506
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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