23 Public finance for public goods JULY.docx

1、23 Public finance for public goods JULY2.3Public finance for public goodsTaxes and public financeTaxation when income is spentTaxes without an excess burdenAdministrative and emotional costs of taxationDeferred taxation: Government borrowingWho pays a tax?Economy-wide effects of taxesReponses to a g

2、overnment budget surplusSummaryWe saw in the previous section that financing and supply of public goods is ideally determined by the Lindahl consensus solution, but that governments lack the information about personal benefits required for implementing the Lindahl solution. The Clarke tax, cost-bene

3、fit calculations, and locational choice are means of hoping to solve the information problem. We shall now set aside the information problem. The question that we address in this section is how to finance public spending on public goods. We would have liked to have unambiguously solved the informati

4、on problem about how much to spend on a public good before beginning to consider how to finance public spending on a public good. We do not however have an unambiguous solution to the information problem. We shall therefore have to suppose that a government somehow knows the benefits to the populati

5、on from a public good and also knows the costs of supplying the public good. Perhaps information not provided by market values was obtained through accurate cost-benefit analysis, or perhaps the government jurisdiction consists of people who have revealed their similar known preferences through loca

6、tional choice. We shall therefore now regard MB for the population and the MC of the public good as known to the government, where MC is determined by the prices of the inputs used to provide the public good.We shall be concerned with taxes when public goods are not congestible or congested. When pu

7、blic goods become congested, the purpose of taxation can be not to finance a public good, but to discourage excessive use and so reduce congestion. For pure public goods or public goods that are not congested, the reason for taxation is to provide means of financing public spending.Public goods can

8、be financed by user prices rather than taxation. User prices require the ability to exclude from benefit people who do not pay, as for example excluding users from a toll road or bridge if they do not pay. People could also, for example, pay a user price every time they call upon the police for assi

9、stance. The user charges could finance the police budget, so avoiding the need for taxation and public finance. If user prices were imposed for calling for police assistance, victims would be paying for police services and people with insufficient money would be denied the protection of the rule of

10、law, which appears socially undesirable and unethical. Since user charges for police assistance would discourage people from reporting crimes, criminals would also have greater opportunities to repeat their crimes. The police also provide a public good through deterrence of crime, and it is not poss

11、ible to directly charge for the benefits of deterrence. User charges are therefore not levied to finance the costs of police protection. Where exclusion from benefit of people who do not pay is possible, voluntary private payment is however in principle an alternative to compulsory taxation of publi

12、c finance. We shall return to consider user pricing as an alternative to taxation and public finance for public goods.Here, we shall now consider taxation and public finance as the means of paying for public goods. After the public goods have been financed through taxation, the benefits from publicl

13、y financed public goods are then available without further payment to everybody. The free access to the publicly financed public goods is efficient, since one person benefiting does not reduce the benefit to any other person. Taxes and public financeThe personal Lindahl prices provide efficient fina

14、ncing for public goods but the Lindahl solution cannot be implemented. If however the efficient Lindahl prices could be personally charged to finance public goods, the payments make for public goods would be in the market for a public good. That is, in the market for the public good, people would be

15、 voluntarily paying their share of the cost of supply.The voluntary Lindahl payments within a market for public goods contrast with financing of public goods through compulsory taxes that are levied on buyers and sellers in other markets and not in the market for the public good itself. The taxes in

16、 other markets can be taxes on incomes earned in the labor market or sales taxes on private spending on private goods. These taxes in other markets are an intrusion into these other markets. The intrusion has a cost, through a personal efficiency loss for taxpayers.To see how the personal efficiency

17、 loss arises, we can consider a tax on income. Figure 2.22 shows an individuals supply of labor function SL (for a week, or month, or year). The supply of labor function shows the substitution between hours worked and free time when the net-of-tax wage that the individual receives changes. As the ne

18、t-of-tax wage increases, the individual substitutes income-earning activity for free time and labor supply (and effort) increases.At the individuals market-determined wage w with no taxation, the individual chooses to work L2 hours. An income tax at a constant t percent reduces the net-of-tax wage p

19、er hour to w(1-t), and the individual responds by decreasing hours worked to L1. Pretax wage given in a labor marketFigure 2.22: The excess burden of an income tax.The tax of t percent is levied on the tax base of L1 hours worked. After the tax, the employer continues to pay the competitively determ

20、ined market wage w. The individuals pre-tax income in figure 2.22 is ABJO and net-of-tax income is CDJO. The difference between gross income and net income is the money ABCD paid as taxes to the government.We see in figure 2.22 that the tax has created a gap between the cost of labor to the employer

21、 w and the wage received by the employee w(1-t). The tax has also resulted in a change in market behavior, indicated in the decline in labor supply from L2 to L1. The change in market behavior has occurred through a substitution response, with the individual substituting free time for productive tim

22、e. The substitution response is the source of a personal efficiency loss.The presence of the personal efficiency loss due to the tax is revealed when we ask the individual in figure 2.22 one of two questions:(1) How much are you prepared to pay the government, in return for the government not levyin

23、g the income tax on you?(2) How much does the government have to give you to compensate you for the tax that has been levied on you?The first question presumes that the tax is not levied, and asks how much the individual is willing to pay to keep the tax at bay. The second question presumes that the

24、 tax is in place, and asks how much the individual has to be paid as compensation for the tax having been levied.Let us suppose that, in answering the questions, the individual in figure 2.22 feels no benefit from the taxes paid to the government. The individual then wants the money paid in taxes re

25、turned. Still, the answer to the question how much the individual is prepared to pay to avoid paying the tax is more than the money paid in taxes. The answer to the question how much the individual has to be compensated for having had to pay the tax is also more than the value of the money paid in t

26、axes. In both cases, there is an excess burden of taxation beyond the value of the money paid in taxes.The excess burden of taxation is the area DBE in figure 2.22. The individual in figure 2.22 is prepared to pay an amount of money DBE that is more than the value of the tax to avoid paying the tax,

27、 and has to be compensated by the amount of money DBE more than the value of the tax for having paid the tax. Why is DBE a personal loss from taxation?When labor is supplied, a personal cost is incurred through free time that would have been available. The personal cost is expressed through the labo

28、r supply function SL, which is a personal MC function for labor supplied. The area under the function SL is correspondingly the personal total cost of supplying labor. We can now proceed through the following steps:(1) Before the tax is imposed, the individuals benefit from market participation in f

29、igure 2.22 is OAE, which is the benefit or income AEHO from supplying L2 hours of labor minus the cost OEH of supplying these hours of labor.(2) After the tax is imposed, the individuals benefit from market participation is OCD, which is the difference between post-tax income ABJO and the personal c

30、ost ODJ in terms of free time forgone of supplying L1 hours of labor.(3) The effect of the tax has therefore been to reduce the gain from market participation by (AEO-CDO)=AEDC.(4) AEDC has two components. One component is the tax revenue ABCD paid to the government. The second component is DBE, whi

31、ch is the additional personal loss from the tax in excess of the tax revenue paid to the government.The efficiency loss of taxationWe have been viewing the individual being taxed as not feeling benefit from the tax paid to the government. Taxes however finance public spending on public goods, and th

32、e public goods can be a source of benefit for the taxpayer. There is however no prospect for gain associated with the excess burden DBE in figure 2.22. The excess burden is purely and simply an efficiency loss, or a waste.The efficiency loss DBE is borne personally by the taxpayer in figure 2.22. Th

33、e personal efficiency loss is not directly observed as any sum of money. It is something that a person had before the tax, but that disappeared after the tax. No sum of money equal to the excess burden of taxation changes hands. The excess burden of taxation is invisible.When the supply-of-labor func