TAX DEDUCTIONS AND CREDITS, DIRECT SUBSIDIES, AND EFFICIENCY IN PUBLIC EXPENDITURE

In: Problems of communism, Band 49, Heft 2, S. 127-142

Abstract

THE TRADITIONAL APPROACH TO THE ANALYSIS OF TAX DEDUCTIONS, CREDITS, AND DIRECT SUBSIDIES RESTS ON CERTAIN IMPLICIT ASSUMPTIONS. IN THIS PAPER THE AUTHOR TAKES A DIFFERENT APPROACH TO THE ANALYSIS OF DEDUCTIONS, CREDITS, AND DIRECT SUBSIDIES, A PUBLIC CHOICE APPROACH WHEREIN ITS ASSUMED THAT THE LEVEL OF PUBLIC EXPENDITURE IS DETERMINED BY INDIVIDUAL PREFERENCES FOR PUBLIC VERSUS PRIVATE GOODS THROUGH VOTING. THESE INDIVIDUAL PREFERENCES IN TURN DEPEND ON INCOME, ON OTHER VARIABLES PERHAPS, AND ON THE RELATIVE PRICE OF PUBLIC GOODS. THUS, THE STRUCTURE OF THE TAX SYSTEM HAS IMPORTANT IMPLICATIONS FOR EFFICIENCY IN PUBLIC EXPENDITURE BECAUSE IT DETERMINES THE TAX-PRICES WHICH DIFFERENT INDIVIDUALS PAY. DIFFERENT TAX STRUCTURES IMPLY DIFFERENT DISTRIBUTIONS OF THE TAX BURDEN AMONG THE INDIVIDUAL TAXPAYERS AND DIFFERENT TAX-PRICES FOR EACH INDIVIDUAL. DIFFERENT SETS OF TAX-PRICES GENERATE DIFFERENT SETS OF INDIVIDUALLY PREFERRED PUBLIC EXPENDITURE LEVELS AND HENCE DIFFERENT VOTING OUTCOMES.