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

James Anderson and Will Martin

No 731, Boston College Working Papers in Economics from Boston College Department of Economics

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.

Keywords: fiscal policy; second best; public goods; distortions; costs of taxation, marginal cost of funds; marginal excess burden, thought experiment (search for similar items in EconPapers)
JEL-codes: D61 F11 H21 H43 (search for similar items in EconPapers)
Date: 2010-01-30
New Economics Papers: this item is included in nep-pbe and nep-pub
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Forthcoming, Journal of Public Economic Theory

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Related works:
Journal Article: Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods (2011)
Working Paper: Costs of taxation and benefits of public goods with multiple taxes and goods (2010)
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