| By: |
Blomquist, Sören (Department of Economics);
Christiansen, Vidar (Department of Economics) |
| Abstract: |
The incidence and efficiency losses of taxes have usually been analysed in
isolation from public expenditures. This negligence of the expenditure side
may imply a serious misperception of the effects of marginal tax rates. The
reason is that part of the marginal tax may in fact be payment for publicly
provided commodities and reflect a cost that the consumers should bear in
order to face the right incentives. Hence, part of the marginal tax serves the
same role as a market price in the sense that it conveys information about a
real social marginal cost of working more hours. We develop this idea formally
by studying an optimal income tax model in combination with a type of public
provision scheme not analyzed before; the provision level is individualized
and positively associated with the individuals’ labour supply. As examples we
discuss day care, elderly care, primary education and health care. We show
that there is a gain in efficiency if public provision of such a service
replaces market purchases. We also show that it is necessary for efficiency
that marginal income tax rates are higher than in economies where the services
are purchased in the market. This is because the optimal tax should be
designed so as to face the taxpayers with the real cost of providing the
services. Hence, it might very well be that economies with higher marginal tax
rates have less severe distortions than economies with lower marginal tax
rates. We also explore whether an efficiency gain is achievable by
alternatively making day care expenses tax deductible and derive a negative
conclusion. |
| Keywords: |
Marginal income tax; public provision; private goods; in-kind transfer; tax deductions |
| JEL: |
H21 H42 I38 |
| Date: |
2007–01–12 |
| URL: |
http://d.repec.org/n?u=RePEc:hhs:uunewp:2007_007&r=pub |