Optimal Provision of Public Goods: A Synthesis

There currently exist two competing approaches in the literature on the optimal provision of public goods. The standard approach highlights the importance of distortionary taxation and distributional concerns. The new approach neutralizes distributional concerns by adjusting the non-linear income tax, and finds that this reinvigorates the simple Samuelson rule when preferences are separable in goods and leisure. We provide a synthesis by demonstrating that both approaches derive from the same basic formula. We further develop the new approach by deriving a general, intuitive formula for the optimal level of a public good without imposing strong assumptions on preferences. This formula shows that distortionary taxation may have a role to play as in the standard approach. However, the main determinants of optimal provision are completely different and the traditional formula with its emphasis on MCF only obtains in a very special case.public good provision, distortionary taxation, distribution

Optimal Provision of Public Goods: A Synthesis

There currently exist two competing approaches in the literature on the optimal provision of public goods. The standard approach highlights the importance of distortionary taxation and distributional concerns. The new approach neutralizes distributional concerns by adjusting the non-linear income tax, and finds that this reinvigorates the simple Samuelson rule when preferences are separable in goods and leisure. We provide a synthesis by demonstrating that both approaches derive from the same basic formula. We further develop the new approach by deriving a general, intuitive formula for the optimal level of a public good without imposing any separability assumptions on preferences. This formula shows that distortionary taxation may have a role to play as in the standard approach. However, the main determinants of optimal provision are completely different and the traditional formula with its emphasis on MCF only obtains in a very special case.

Optimal Provision of Public Goods:A Synthesis

There currently exist two competing approaches in the literature on the optimal provision of public goods. The standard approach highlights the importance of distortionary taxa-tion and distributional concerns. The new approach neutralizes distributional concerns by adjusting the non-linear income tax, and finds that this reinvigorates the simple Samuelson rule when preferences are separable in goods and leisure. We provide a synthesis by demon-strating that both approaches derive from the same basic formula. We further develop the new approach by deriving a general, intuitive formula for the optimal level of a public good without imposing any separability assumptions on preferences. This formula shows that distortionary taxation may have a role to play as in the standard approach. However, the main determinants of optimal provision are completely different and the traditional formula with its emphasis on MCF only obtains in a very special case. (JEL: H41, H23, H11) ∗We are grateful to Kenneth Small for discussions leading up to this paper. We also wish to thank Henrik Jacobsen Kleven for detailed comments on a previous draft.

An Evaluation of the Tax-Transfer Treatment of Married Couples in European Countries

This paper presents an evaluation of the tax-transfer treatment of married couples in 15 EU countries using the EUROMOD microsimulation model. First, we show that many tax-transfer schemes in Europe feature negative jointness defined as a situation where the tax rate on one person depends negatively on the earnings of the spouse. This stands in contrast to the previous literature on this question, which has focused on a specific form of positive jointness. The presence of negative jointness is driven by family-based and means-tested transfer programs combined with tax systems that usually feature very little jointness. Second, we consider the labour supply distortion on secondary earners relative to primary earners implied by the current tax-transfer systems, and study the welfare effects of small reforms that change the relative taxation of spouses. By adopting a small-reform methodology, it is possible to set out a simple analysis based on more realistic labour supply models than those considered in the existing literature. We present microsimulations showing that simple revenue-neutral reforms that lower the tax burden on secondary earners are associated with substantial welfare gains in most countries. Finally, we consider the tax-transfer implications of marriage and estimate the so-called marriage penalty. For most countries, we find large marriage penalties at the bottom of the distribution driven primarily by features of the transfer system.marriage tax, couples, optimal tax, redistribution, labour supply, joint taxation

An Evaluation of the Tax-Transfer Treatment of Married Couples in European Countries

This paper presents an evaluation of the tax-transfer treatment of married couples in 15 EU countries using the EUROMOD microsimulation model. First, we show that many tax-transfer schemes in Europe feature negative jointness defined as a situation where the tax rate on one person depends negatively on the earnings of the spouse. This stands in contrast to the previous literature on this question, which has focused on a specific form of positive jointness. The presence of negative jointness is driven by family-based and means-tested transfer programs combined with tax systems that usually feature very little jointness. Second, we consider the labor supply distortion on secondary earners relative to primary earners implied by the current tax-transfer systems, and study the welfare effects of small reforms that change the relative taxation of spouses. By adopting a small-reform methodology, it is possible to set out a simple analysis based on more realistic labor supply models than those considered in the existing literature. We present microsimulations showing that simple revenue-neutral reforms that lower the tax burden on secondary earners are associated with substantial welfare gains in most countries. Finally, we consider the tax-transfer implications of marriage and estimate the so-called marriage penalty. For most countries, we find large marriage penalties at the bottom of the distribution driven primarily by features of the transfer system.

EPRU Working Paper Series Optimal Provision of Public Goods: A Synthesis Optimal Provision of Public Goods: A Synthesis *

Abstract There currently exist two competing approaches in the literature on the optimal provision of public goods. The standard approach highlights the importance of distortionary taxation and distributional concerns. The new approach neutralizes distributional concerns by adjusting the non-linear income tax, and finds that this reinvigorates the simple Samuelson rule when preferences are separable in goods and leisure. We provide a synthesis by demonstrating that both approaches derive from the same basic formula. We further develop the new approach by deriving a general, intuitive formula for the optimal level of a public good without imposing any separability assumptions on preferences. This formula shows that distortionary taxation may have a role to play as in the standard approach. However, the main determinants of optimal provision are completely different and the traditional formula with its emphasis on MCF only obtains in a very special case. (JEL: H41, H23, H11) * We are grateful to Kenneth Small for discussions leading up to this paper. We also wish to thank Henrik Jacobsen Kleven for detailed comments on a preliminary draft

An evaluation of the tax-transfer treatment of married couples in European countries

This paper presents an evaluation of the tax-transfer treatment of married couples in 15 EU countries using the EUROMOD microsimulation model. First, we show that many tax-transfer schemes in Europe feature negative jointness defined as a situation where the tax rate on one person depends negatively on the earnings of the spouse. This stands in contrast to the previous literature on this question, which has focused on a specific form of positive jointness. The presence of negative jointness is driven by family-based and means-tested transfer programs combined with tax systems that usually feature very little jointness. Second, we consider the labour supply distortion on secondary earners relative to primary earners implied by the current tax-transfer systems, and study the welfare effects of small reforms that change the relative taxation of spouses. By adopting a small-reform methodology, it is possible to set out a simple analysis based on more realistic labour supply models than those considered in the existing literature. We present microsimulations showing that simple revenue-neutral reforms that lower the tax burden on secondary earners are associated with substantial welfare gains in most countries. Finally, we consider the tax-transfer implications of marriage and estimate the so-called marriage penalty. For most countries, we find large marriage penalties at the bottom of the distribution driven primarily by features of the transfer system