Public Economics Lectures Part 1: Introduction

Goulder and Williams Formula
Obtain following formula for marginal excess burden of raising tax on
good k:
dEB
dτ k
= τ k Q k
p k
η k
− τ LL
p k
η L
s k
τ k , p k , and Q k are the tax, price, and quantity consumed of good k
η k and η L are own-price elasticity of good k and labor
s k =
P k Q K
is budget share of good k
wl(1−τ L )
Only need estimates of own-price elasticities to implement this
formula
Why? Price increase in all consumption goods has the same effect on
labor supply as an increase in tax on labor:
(1 + t) ∑ p k c k = wl
k
Equivalence between consumption tax and labor income tax
Public Economics Lectures () Part 3: Effi ciency 49 / 105