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GAMBLING WITH TAX DOLLARS
Author(s) -
Santore Rudy
Publication year - 2009
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.2009.00307.x
Subject(s) - economics , public economics , tax revenue , revenue , welfare , government (linguistics) , tax basis , optimal tax , microeconomics , tax reform , state income tax , finance , market economy , gross income , linguistics , philosophy
Municipalities often spend money in the hopes of generating new tax revenue. Because the estimated increase in tax revenues is uncertain, these policies are essentially gambles with tax dollars. This paper shows that it is possible for a welfare‐maximizing government to exhibit risk‐loving behavior even though individual taxpayers are risk‐averse. This risk‐loving behavior may occur when the government has the option to provide an indivisible public good, such as a park. Interestingly, the poorest and wealthiest municipalities do not find gambles optimal. For communities that find gambles optimal, both the provision of the public good and tax rates are affected.