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Distortionary Taxation and Optimal Public Spending on Productive Activities
Author(s) -
Feehan James P.,
Matsumoto Mutsumi
Publication year - 2002
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/40.1.60
Subject(s) - economics , public good , microeconomics , revenue , consumption (sociology) , production (economics) , public spending , general equilibrium theory , public capital , public economics , capital (architecture) , interpretation (philosophy) , public investment , finance , social science , programming language , archaeology , sociology , politics , political science , computer science , law , history
Using a general‐equilibrium model with endogenous factor supplies, this article investigates the provision of factor‐augmenting public inputs. Such inputs are intermediate goods that affect production functions in a collective manner and give rise to increasing returns. Unlike with collective consumption goods, deviation from the first‐best condition for a public input is inappropriate if taxes are set optimally. When taxes are not optimal, a second‐best rule must include a feedback effect on revenue as well as the deadweight cost of taxes. Implications for benefit‐cost analysis and for interpretation of estimates of the social returns to public capital are explored.