Status Effects, Public Goods Provision, and the Excess Burden

Ron Wendner and Lawrence H. Goulder

MPRA Paper from University Library of Munich, Germany

Abstract: Most studies of the optimal provision of public goods or the excess burden from taxation assume that individual utility is independent of other individuals' consumption. This paper investigates public good provision and excess burden in a model that allows for interdependence in consumption in the form of status (relative consumption) effects. In the presence of such effects, consumption and labor taxes no longer are pure distortionary taxes but have a corrective tax element that addresses an externality from consumption. As a result, the marginal excess burden of consumption taxes is lower than in the absence of status effects, and will be negative if the consumption tax rate is below the "Pigouvian" rate. Correspondingly, when consumption or labor tax rates are below the Pigouvian rate, the second-best level of public goods provision is above the first-best level, contrary to findings from models without status effects. For plausible functional forms and parameters relating to status effects, the marginal excess burden from existing U.S. labor taxes is substantially lower than in most prior studies, and is negative in some cases.

Keywords: status effects; excess burden; deadweight loss; public goods provision; corrective taxation; consumption externality; first best; second best (search for similar items in EconPapers)
JEL-codes: D62 H23 H41 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (90)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/8260/1/MPRA_paper_8260.pdf original version (application/pdf)

Related works:
Journal Article: Status effects, public goods provision, and excess burden (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:8260

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().