TY  - JOUR
AU  - Ballard,Charles L.
AU  - Fullerton,Don
TI  - Distortionary Taxes and the Provision of Public Goods
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3506
PY  - 1993
Y2  - October 1993
UR  - http://www.nber.org/papers/w3506
L1  - http://www.nber.org/papers/w3506.pdf
N1  - Author contact info:
Don Fullerton
Department of Finance
University of Illinois
BIF Box#30 (MC520)
515 East Gregory Drive
Champaign, IL  61820
Tel: 217/244-3621
Fax: 217/244-3102
E-Mail: dfullert@illinois.edu
AB  - 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.
ER  -