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A Note on the Optimal Supply of Public Goods and the Distortionary Cost of Taxation

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  • Kaplow, Louis

Abstract

In my original paper, I demonstrated that, under standard simplifying assumptions, it is possible to finance a public good in a manner such that a Pareto improvement results whenever the simple cost-benefit test is satisfied-that is, without any adjustment for the "marginal cost of funds." In particular, the method of finance involves adjusting the income tax so that the combined incidence of the tax adjustment and the public good is distribution neutral. One implication of this result is that, if the public good is financed in some other manner, the difference in outcome will be purely redistributive, so that any change in distortionary costs will be accompanied by an opposing change in redistributive benefits. I also showed how this analysis is applicable to determining the optimal level of environmental taxes. Browning and Liu’s comment does not disagree with any of these claims. Instead, their argument focuses on how one should interpret the term "distortion." It should not be surprising, however, that under any interpretation of the term-including their preferred one-my conclusions about how policy analysis should be conducted continue to be correct.

Suggested Citation

  • Kaplow, Louis, 1998. "A Note on the Optimal Supply of Public Goods and the Distortionary Cost of Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(1), pages 117-125, March.
    • Handle: RePEc:ntj:journl:v:51:y:1998:i:1:p:117-25
    DOI: 10.1086/NTJ41789316
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    References listed on IDEAS

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    1. Browning, Edgar K. & Liu, Liqun, 1998. "The Optimal Supply of Public Goods and the Distortionary Cost of Taxation: Comment," National Tax Journal, National Tax Association, vol. 51(n. 1), pages 103-16, March.
    2. Browning, Edgar K. & Liu, Liqun, 1998. "The Optimal Supply of Public Goods and the Distortionary Cost of Taxation: Comment," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(1), pages 103-116, March.
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    Cited by:

    1. Dan Usher, 2006. "Should The Samuelson Rule Be Modified To Account For The Marginal Cost Of Public Funds?," Working Paper 1065, Economics Department, Queen's University.
    2. Bjart Holtsmark, 2019. "Is the marginal cost of public funds equal to one?," Discussion Papers 893, Statistics Norway, Research Department.

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    3. Bjart Holtsmark, 2019. "Is the marginal cost of public funds equal to one?," Discussion Papers 893, Statistics Norway, Research Department.
    4. Kaplow, Louis, 1998. "A Note on the Optimal Supply of Public Goods and the Distortionary Cost of Taxation," National Tax Journal, National Tax Association, vol. 51(n. 1), pages 117-25, March.

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