On the (Ir)Relevence of Distribution and Labor Supply Distortion of Government Policy

19 Pages Posted: 27 May 2004 Last revised: 1 Sep 2010

See all articles by Louis Kaplow

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

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Date Written: May 2004

Abstract

Should the assessment of government policies, such as the provision of public goods and the control of externalities, deviate from first-best principles to account for distributive effects and for the distortionary cost of labor income taxation? For example, is the optimal extent of public goods provision smaller than indicated by the Samuelson rule because finance is distortionary? Or should environmental regulations fail to internalize externalities fully if the incidence of the regulations is regressive? It is suggested that these questions are best addressed by considering distribution-neutral implementation, in which budget balance is achieved by choosing an adjustment to the income tax that offsets the distributive impact of the policy in question. In basic cases, both distribution and labor supply distortion are moot because the target policy and the tax adjustment produce offsetting effects on each. Thus, traditional first-best principles provide good benchmarks for policy analysis after all. Moreover, even when actual implementation will not be distribution neutral in aggregate, distribution-neutral policy analysis has many conceptual and practical virtues that render it quite useful to investigators.

Suggested Citation

Kaplow, Louis, On the (Ir)Relevence of Distribution and Labor Supply Distortion of Government Policy (May 2004). NBER Working Paper No. w10490. Available at SSRN: https://ssrn.com/abstract=546287

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