TY - JOUR

T1 - The optimal division of government expenditure between public goods and transfer payments

AU - Creedy, John

AU - Moslehi, Solmaz

PY - 2010/6

Y1 - 2010/6

N2 - This paper examines the optimal ratio of transfer payments to expenditure on public goods, for a given income tax rate. The transfer payment is then determined by the government's budget constraint. The optimal ratio of transfers to public good expenditure per person is expressed as a function of the ratio of the median to the arithmetic mean wage, and of the tax rate. Reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods, because of adverse incentive effects.

AB - This paper examines the optimal ratio of transfer payments to expenditure on public goods, for a given income tax rate. The transfer payment is then determined by the government's budget constraint. The optimal ratio of transfers to public good expenditure per person is expressed as a function of the ratio of the median to the arithmetic mean wage, and of the tax rate. Reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods, because of adverse incentive effects.

UR - http://www.scopus.com/inward/record.url?scp=77954112464&partnerID=8YFLogxK

U2 - 10.1111/j.1467-8454.2010.00389.x

DO - 10.1111/j.1467-8454.2010.00389.x

M3 - Article

AN - SCOPUS:77954112464

SN - 0004-900X

VL - 49

SP - 87

EP - 100

JO - Australian Economic Papers

JF - Australian Economic Papers

IS - 2

ER -