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4 - PUBLIC FINANCE FOR PUBLIC GOODS

Arye L. Hillman
Arye L. Hillman
Affiliation:
Bar-Ilan University, Israel
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Summary

Societies assign responsibilities for financing public goods to governments because of the asymmetric-information problem and the associated incentives to misrepresent preferences (or free ride). In this chapter, we study the financing of public goods by governments. Our focus is on efficiency rather than social justice.

In investigating how efficient public finance for public goods might be achieved, we face practical impediments. Political and bureaucratic principal–agent problems can prevent efficient outcomes in the public interest. Our conclusion from chapter 3 is that governments remain subject to the asymmetric-information problem; governments cannot observe and so do not know the true subjective benefits ∑MB that public goods provide to a population.

Without revelation of personal preferences through the Clarke tax, we could hope that governments have nonetheless been successful in using cost-benefit analysis to approximate ∑MB. That is, ideally we would want governments to have used cost-benefit analysis to attempt to identify the efficient public spending that the government's taxes will finance. Because of the principal–agent problems, we cannot predict that attempts at cost-benefit analysis will necessary have been made; indeed, in practice, decisions regarding public spending are political and are revealed when a government presents its budget.

The Tiebout locational-choice mechanism is based on choice among governments. The asymmetric-information problem is solved when people voluntarily group themselves into government jurisdictions according to their preferences for different public goods.

Type
Chapter
Information
Public Finance and Public Policy
Responsibilities and Limitations of Government
 , pp. 243 - 306
Publisher: Cambridge University Press
Print publication year: 2009

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References

Dahlby, B., 1998. Progressive taxation and the social marginal cost of public finds. Journal of Public Economics 67:105–22.CrossRefGoogle Scholar
Dupuit, J., 1844/1969. On the measurement of the utility of public works. In Arrow, K. J. and Scitovsky, T. (Eds.), Readings in Welfare Economics. Irwin, Homewood IL, pp. 255–83.Google Scholar
Harberger, A., 1964. The measurement of waste. American Economic Review 61:58–76.Google Scholar
Usher, D., 1984. An instructive derivation of the expression for the marginal cost of public funds. Public Finance 39:406–11.Google Scholar
Wildasin, D. E., 1984. On public provision with distortionary taxation. Economic Enquiry 22:227–43.CrossRefGoogle Scholar
Zodrow, G. R., 2007. The property tax incidence debate and the mix of state and local finance of local public expenditures. CESifo Economic Studies 53:495–521.CrossRefGoogle Scholar
Allgood, S., and Snow, A., 1998. The marginal cost of raising tax revenue and redistributing income. Journal of Political Economy 106:1246–73.CrossRefGoogle Scholar
Ballard, C. L., Shoven, J. B., and Whalley, J., 1985. General equilibrium computations of the marginal welfare costs of taxes in the United States. American Economic Review 75:128–38.Google Scholar
Browning, E. K., 1987. On the marginal welfare cost of taxation. American Economic Review 77:11–23.Google Scholar
Fullerton, D., 1991. Reconciling recent estimates of the marginal welfare cost of taxation. American Economic Review 81:302–08.Google Scholar
Goulder, L. H., and Williams, R. C. III, 2003. The substantial bias from ignoring general equilibrium effects in estimating excess burden, and a practical solution. Journal of Political Economy 111:898–927.CrossRefGoogle Scholar
Jorgensen, D. W., and Yun, K.-Y., 1993. The excess burden of taxation in the U.S. In Heimler, A. and Meulders, D. (Eds.), Empirical Approaches to Economic Policy Modeling. Chapman and Hall, New York, pp. 9–24.CrossRefGoogle Scholar
Stuart, C., 1984. Welfare costs per additional dollar of tax revenue in the United States. American Economic Review 74:352–62.Google Scholar
Fideli, S., and Forte, F., 1999. Joint income and VAT-chain evasion. European Journal of Political Economy 15:391–415.CrossRefGoogle Scholar
Tait, A. A., 1988. Value-Added Taxation: International Practice and Problems. International Monetary Fund, Washington DC.Google Scholar
Hillman, A. L., 1989/2001. The Political Economy of Protection. Harwood, Chur, Switzerland. Reprinted 2001, Routledge, London.Google Scholar
Hillman, A. L., and Cassing, J. H., 1985. Political influence motives and the choice between tariffs and quotas. Journal of International Economics 19:279–90.Google Scholar
Hillman, A. L., and Ursprung, H. W., 1988. Domestic politics, foreign interests and international trade policy. American Economic Review 78: 729–45. Reprinted in W. J. Ethier and A. L. Hillman (Eds.), 2008. The WTO and the Political Economy of Trade Policy. Edward Elgar, Cheltenham UK, pp. 99–115.Google Scholar
Krueger, A. O., 1974. The political economy of the rent-seeking society. American Economic Review 64:291–303.Google Scholar
Hillman, A. L., and Katz, E., 1984. Excise taxes, import restrictions, and the allocation of time to illegal activity. International Review of Law and Economics 4:213–22.CrossRefGoogle Scholar
Ng, Y.-K., 1987. Diamonds are a government's best friend: Burden-free taxes on goods valued for their value. American Economic Review 77:186–91.Google Scholar
Mayshar, J., 1991. Taxation with costly tax administration. Scandinavian Journal of Economics 93:75–88.CrossRefGoogle Scholar
Slemrod, J., and Yitzhaki, S., 1987. The optimal size of a tax collection agency. Scandinavian Journal of Economics 80:25–34.Google Scholar
Buchanan, J. M., 1967. Public Finance in Democratic Process: Fiscal Institutions and Individual Choice. The University of North Carolina Press, Chapel Hill.Google Scholar
Puviani, A., 1903/1973. Teoria dell' Ilusione Finanaziara. ISED, Milan.
Fullerton, D., 1982. On the possibility of an inverse relationship between tax rates and government revenues. Journal of Public Economics 19:3–22.CrossRefGoogle Scholar
Brooks, M., and Head, J., 1997. Tax avoidance: In economics, law and public choice. In Cooper, G. (Ed.), Tax Avoidance and the Rule of Law. International Bulletin of Fiscal Documentation, Amsterdam, pp. 53–91.Google Scholar
Cowell, F. A., 1990. Cheating the Government: The Economics of Evasion. MIT Press, Cambridge MA.Google Scholar
Graetz, M. J., Reinganum, J. F., and Wilde, L. L., 1986. The tax compliance game: Toward an interactive theory of law enforcement. Journal of Law, Economics, and Organization 2:1–32.Google Scholar
Slemrod, J., 2007. Cheating ourselves: The economics of tax evasion. Journal of Economic Perspectives 21:25–48.CrossRefGoogle Scholar
Tzur, J., and Yaari, V., 2000. Tax evasion as the outcome of organizational design. Journal of Accounting, Auditing, and Finance 15:47–72.CrossRefGoogle Scholar
Yaniv, G., 2003. Auditing ghosts by prosperity signals. Economics Bulletin 8:1–10.Google Scholar
Adams, C., 1993. For Good or Evil: The Impact of Taxes on the Course of Civilization. Madison Books, London.Google ScholarPubMed
Hindriks, J., Muthoo, A., and Keen, M., 1999. Corruption, extortion and evasion. Journal of Public Economics 74:395–430.CrossRefGoogle Scholar
Hunter, W. J., and Nelson, M. A., 1995. Tax enforcement: A public choice perspective. Public Choice 82:53–67.CrossRefGoogle Scholar
Masciandaro, D., 1999. Money laundering: The economics of regulation. European Journal of Law and Economics 7:225–40.CrossRefGoogle Scholar
Young, M., Reksulak, M., and Shughart, W. F. II, 2001. The political economy of the IRS. Economics and Politics 13:201–20.CrossRefGoogle Scholar
Schneider, F., 2005. Shadow economies around the world: What do we really know?European Journal of Political Economy 21:598–642.CrossRefGoogle Scholar
,Organisation for Economic Co-operation and Development, 2002. Measuring the Non-Observed Economy: A Handbook. Paris.Google Scholar
Barro, R. J., 1974. Are government bonds net wealth?Journal of Political Economy 82:1095–117.CrossRefGoogle Scholar
Buchanan, J. M., 1958. Public Principles of Public Debt. Irwin, Homewood IL.Google Scholar
Buchanan, J. M., 1976. Barro on the Ricardian equivalence theorem. Journal of Political Economy 84:337–42.CrossRefGoogle Scholar
Buchanan, J. M., and Wagner, R., 1977. Democracy in Deficit. Academic Press, New York.Google Scholar
Ricardo, D., 1817/1951. Principles of Political Economy and Taxation, Works and Correspondence. Straffa, P. (Ed.), Cambridge University Press, Cambridge UK.Google Scholar
Hicks, J. R., 1939 (2nd edition, 1944). Value and Capital. Clarendon Press, Oxford.Google Scholar
Hicks, J. R., 1944. The four consumers' surplus. Review of Economic Studies 11:31–41.CrossRefGoogle Scholar
Mishan, E. J., and Quah, E., 2007. Cost-Benefit Analysis. Routledge, London.Google Scholar
Dahlby, B., 1998. Progressive taxation and the social marginal cost of public finds. Journal of Public Economics 67:105–22.CrossRefGoogle Scholar
Dupuit, J., 1844/1969. On the measurement of the utility of public works. In Arrow, K. J. and Scitovsky, T. (Eds.), Readings in Welfare Economics. Irwin, Homewood IL, pp. 255–83.Google Scholar
Harberger, A., 1964. The measurement of waste. American Economic Review 61:58–76.Google Scholar
Usher, D., 1984. An instructive derivation of the expression for the marginal cost of public funds. Public Finance 39:406–11.Google Scholar
Wildasin, D. E., 1984. On public provision with distortionary taxation. Economic Enquiry 22:227–43.CrossRefGoogle Scholar
Zodrow, G. R., 2007. The property tax incidence debate and the mix of state and local finance of local public expenditures. CESifo Economic Studies 53:495–521.CrossRefGoogle Scholar
Allgood, S., and Snow, A., 1998. The marginal cost of raising tax revenue and redistributing income. Journal of Political Economy 106:1246–73.CrossRefGoogle Scholar
Ballard, C. L., Shoven, J. B., and Whalley, J., 1985. General equilibrium computations of the marginal welfare costs of taxes in the United States. American Economic Review 75:128–38.Google Scholar
Browning, E. K., 1987. On the marginal welfare cost of taxation. American Economic Review 77:11–23.Google Scholar
Fullerton, D., 1991. Reconciling recent estimates of the marginal welfare cost of taxation. American Economic Review 81:302–08.Google Scholar
Goulder, L. H., and Williams, R. C. III, 2003. The substantial bias from ignoring general equilibrium effects in estimating excess burden, and a practical solution. Journal of Political Economy 111:898–927.CrossRefGoogle Scholar
Jorgensen, D. W., and Yun, K.-Y., 1993. The excess burden of taxation in the U.S. In Heimler, A. and Meulders, D. (Eds.), Empirical Approaches to Economic Policy Modeling. Chapman and Hall, New York, pp. 9–24.CrossRefGoogle Scholar
Stuart, C., 1984. Welfare costs per additional dollar of tax revenue in the United States. American Economic Review 74:352–62.Google Scholar
Fideli, S., and Forte, F., 1999. Joint income and VAT-chain evasion. European Journal of Political Economy 15:391–415.CrossRefGoogle Scholar
Tait, A. A., 1988. Value-Added Taxation: International Practice and Problems. International Monetary Fund, Washington DC.Google Scholar
Hillman, A. L., 1989/2001. The Political Economy of Protection. Harwood, Chur, Switzerland. Reprinted 2001, Routledge, London.Google Scholar
Hillman, A. L., and Cassing, J. H., 1985. Political influence motives and the choice between tariffs and quotas. Journal of International Economics 19:279–90.Google Scholar
Hillman, A. L., and Ursprung, H. W., 1988. Domestic politics, foreign interests and international trade policy. American Economic Review 78: 729–45. Reprinted in W. J. Ethier and A. L. Hillman (Eds.), 2008. The WTO and the Political Economy of Trade Policy. Edward Elgar, Cheltenham UK, pp. 99–115.Google Scholar
Krueger, A. O., 1974. The political economy of the rent-seeking society. American Economic Review 64:291–303.Google Scholar
Hillman, A. L., and Katz, E., 1984. Excise taxes, import restrictions, and the allocation of time to illegal activity. International Review of Law and Economics 4:213–22.CrossRefGoogle Scholar
Ng, Y.-K., 1987. Diamonds are a government's best friend: Burden-free taxes on goods valued for their value. American Economic Review 77:186–91.Google Scholar
Mayshar, J., 1991. Taxation with costly tax administration. Scandinavian Journal of Economics 93:75–88.CrossRefGoogle Scholar
Slemrod, J., and Yitzhaki, S., 1987. The optimal size of a tax collection agency. Scandinavian Journal of Economics 80:25–34.Google Scholar
Buchanan, J. M., 1967. Public Finance in Democratic Process: Fiscal Institutions and Individual Choice. The University of North Carolina Press, Chapel Hill.Google Scholar
Puviani, A., 1903/1973. Teoria dell' Ilusione Finanaziara. ISED, Milan.
Fullerton, D., 1982. On the possibility of an inverse relationship between tax rates and government revenues. Journal of Public Economics 19:3–22.CrossRefGoogle Scholar
Brooks, M., and Head, J., 1997. Tax avoidance: In economics, law and public choice. In Cooper, G. (Ed.), Tax Avoidance and the Rule of Law. International Bulletin of Fiscal Documentation, Amsterdam, pp. 53–91.Google Scholar
Cowell, F. A., 1990. Cheating the Government: The Economics of Evasion. MIT Press, Cambridge MA.Google Scholar
Graetz, M. J., Reinganum, J. F., and Wilde, L. L., 1986. The tax compliance game: Toward an interactive theory of law enforcement. Journal of Law, Economics, and Organization 2:1–32.Google Scholar
Slemrod, J., 2007. Cheating ourselves: The economics of tax evasion. Journal of Economic Perspectives 21:25–48.CrossRefGoogle Scholar
Tzur, J., and Yaari, V., 2000. Tax evasion as the outcome of organizational design. Journal of Accounting, Auditing, and Finance 15:47–72.CrossRefGoogle Scholar
Yaniv, G., 2003. Auditing ghosts by prosperity signals. Economics Bulletin 8:1–10.Google Scholar
Adams, C., 1993. For Good or Evil: The Impact of Taxes on the Course of Civilization. Madison Books, London.Google ScholarPubMed
Hindriks, J., Muthoo, A., and Keen, M., 1999. Corruption, extortion and evasion. Journal of Public Economics 74:395–430.CrossRefGoogle Scholar
Hunter, W. J., and Nelson, M. A., 1995. Tax enforcement: A public choice perspective. Public Choice 82:53–67.CrossRefGoogle Scholar
Masciandaro, D., 1999. Money laundering: The economics of regulation. European Journal of Law and Economics 7:225–40.CrossRefGoogle Scholar
Young, M., Reksulak, M., and Shughart, W. F. II, 2001. The political economy of the IRS. Economics and Politics 13:201–20.CrossRefGoogle Scholar
Schneider, F., 2005. Shadow economies around the world: What do we really know?European Journal of Political Economy 21:598–642.CrossRefGoogle Scholar
,Organisation for Economic Co-operation and Development, 2002. Measuring the Non-Observed Economy: A Handbook. Paris.Google Scholar
Barro, R. J., 1974. Are government bonds net wealth?Journal of Political Economy 82:1095–117.CrossRefGoogle Scholar
Buchanan, J. M., 1958. Public Principles of Public Debt. Irwin, Homewood IL.Google Scholar
Buchanan, J. M., 1976. Barro on the Ricardian equivalence theorem. Journal of Political Economy 84:337–42.CrossRefGoogle Scholar
Buchanan, J. M., and Wagner, R., 1977. Democracy in Deficit. Academic Press, New York.Google Scholar
Ricardo, D., 1817/1951. Principles of Political Economy and Taxation, Works and Correspondence. Straffa, P. (Ed.), Cambridge University Press, Cambridge UK.Google Scholar
Hicks, J. R., 1939 (2nd edition, 1944). Value and Capital. Clarendon Press, Oxford.Google Scholar
Hicks, J. R., 1944. The four consumers' surplus. Review of Economic Studies 11:31–41.CrossRefGoogle Scholar
Mishan, E. J., and Quah, E., 2007. Cost-Benefit Analysis. Routledge, London.Google Scholar

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