Integrating Tax Distortions and Externality Theory

Charles A. M. De Bartolome

Journal of Public Economic Theory, 1999, vol. 1, issue 3, 339-358

Abstract: Tax distortions are interpreted as fiscal externalities. By purchasing a taxed commodity, the individual generates tax revenue that is a benefit external to the purchaser. Behaving noncooperatively, the individual chooses a quantity that is less than the efficient level. The excess burden is interpreted as the benefit of choosing quantities cooperatively. The analysis clarifies the difference between the marginal cost of funds and the marginal excess burden, and explains the presence of compensated demands in the Harberger Triangle, in the Index of Discouragement, and in the Ramsey Equations.

Date: 1999
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