Status Effects, Public Goods Provision, and the Excess Burden

57 Pages Posted: 15 Apr 2008

See all articles by Ronald Wendner

Ronald Wendner

University of Graz - Department of Economics

Lawrence H. Goulder

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

Date Written: January 1, 2008

Abstract

Most studies of the optimal provision of public goods or the excess burden from taxation assume that individual utility is independent of other individuals' consumption. This paper investigates public good provision and excess burden in a model that allows for interdependence in consumption in the form of status (relative consumption) effects. In the presence of such effects, consumption and labor taxes no longer are pure distortionary taxes but have a corrective tax element that addresses an externality from consumption. As a result, the marginal excess burden of consumption taxes is lower than in the absence of status effects, and will be negative if the consumption tax rate is below the "Pigouvian" rate. Correspondingly, when consumption or labor tax rates are below the Pigouvian rate, the second-best level of public goods provision is above the first-best level, contrary to findings from models without status effects. For plausible functional forms and parameters relating to status effects, the marginal excess burden from existing U.S. labor taxes is substantially lower than in most prior studies, and is negative in some cases.

Keywords: status effects, excess burden, deadweight loss, public goods provision, corrective taxation, consumption externality, first best, second best, taxation, consumption externality, first best, second best

JEL Classification: D62, H23, H41

Suggested Citation

Wendner, Ronald and Goulder, Lawrence H., Status Effects, Public Goods Provision, and the Excess Burden (January 1, 2008). Available at SSRN: https://ssrn.com/abstract=1119604 or http://dx.doi.org/10.2139/ssrn.1119604

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Lawrence H. Goulder

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