DP7831 Tax Rules

Author(s): Hans Gersbach, Volker Hahn, Stephan Imhof
Publication Date: May 2010
Keyword(s): constitutional design, provision of public projects, taxes and subsidies, voting
JEL(s): D72, H40
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7831

We examine the provision of public projects under tax and subsidy rules. We find that tax rules separated from project cum subsidy decisions exhibit several advantages when incentive problems of the agenda-setter are taken into account. In particular, tax rules may prevent the proposal of inefficient projects that benefit only a small lobby group. We propose ?redistribution efficiency? as a socially desirable property of proposals and find that tax rules always guarantee this kind of efficiency. We show that rules on subsidies combined with discretion regarding taxes always yield socially inferior proposals. Finally, tax rules induce the agenda-setter to look for potential improvements of public projects.