The optimal supply of public goods and the distortionary cost of taxation: Comment

Louis Kaplow argues in his recent paper that there are a wide variety of situations in which the income tax financing of a public good is nondistortionary. Specifically, this occurs when the additional tax liability of each person equals that person's additional benefit from the public good. We show that the income tax does distort in exactly the cases where Kaplow argues that there is no distortion, at least in the conventional sense of the term "distort." Specifically, we show that taxpayers will be better off, and will prefer a larger quantity of the public good, if lump sum taxes are used to finance the public good rather than an increase in the income tax rate. This conclusion holds for all the specifications (regarding the nature of the public good) discussed by Kaplow.