Distortionary Taxes and the Provision of Public Goods

19 Pages Posted: 21 Aug 2007 Last revised: 10 Aug 2010

See all articles by Charles Ballard

Charles Ballard

Michigan State University

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 1990

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

Ballard, Charles L. and Fullerton, Don, Distortionary Taxes and the Provision of Public Goods (November 1990). NBER Working Paper No. w3506. Available at SSRN: https://ssrn.com/abstract=471506

Charles L. Ballard (Contact Author)

Michigan State University ( email )

East Lansing, MI 48824
United States

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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