Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects

Will J Martin () and James Anderson ()

No 617, 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 very much lower measures of the marginal welfare cost of taxes and greater public good provision than indicated by traditional, compensated analyses. We confirm that this difference remains substantial with newer elasticity estimates, but show that either compensated or uncompensated measures of the marginal cost of funds can be used to evaluate the costs of taxation– and will provide the same result– as long as the income effects of both taxes and public good provision are incorporated in a consistent manner.

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)
New Economics Papers: this item is included in nep-fmk, nep-pbe and nep-pub
Date: 2005-09-08
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Working Paper: Costs of taxation and the benefits of public goods: the role of income effects (2005)
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