Public Finance Review

Although real capital income from certain sources may be subject to tax at very high rates in an inflationary economy, this article suggests that individuals avoid individual income taxation on most capital income by saving in tax- preferred assets, and by not realizing or not reporting capital income. It is found that the average marginal rate of federal individual income tax on all capital income is about 9%. Additionally, the net amount of income from capital reported on individual returns is less than one-third of net income from capital (excluding inflationary returns) in the economy. For nominal capital income, both the inclusion rate and the average marginal rate are much lower.

Very little statistical research has been done on the overall burden of taxation in Mexico. This article presents estimates by family income class of effective Mexican tax rates in 1975 at the federal and overall levels. Even after adjusting for different income bases and shifting assumptions, what emerges is an essentially proportional tax incidence pattern.

This article demonstrates that the methodology developed by Aaron and McGuire (1970) and Maital (1973, 1975) for estimating the distributional implications of public goods, which has been extensively used in empirical studies, is critically dependent on a mathematically convenient but conceptually questionable assumption that has often resulted in implausible incidence conclusions. Specifically, the Aaron-McGuire-Maital approach assumes no substitutability between private income and public goods, which is technically translated into additively separate utility functions. This article reviews the distributional implications of public goods in the light of a generalized formulation of preference indicators. The most important conclusion is that if the assumption of separability is relaxed, the usual smooth neoclassical utility functions will at worst imply no redistribution—but never a progressive (that is, pro-rich) incidence outcome. Moreover, under the generalized formulation, the critical role in deriving the benefit incidence results is played by the elasticity of substitution between private and public goods and not by the elasticity of marginal utility of income, the importance of which is contingent on the particular functional form employed in the analysis.

Building upon recent research designed to measure the progressivity of the pub-lic budget, this article contributes a mathematical and computational method for measuring the progressivity of public expenditures and net fiscal incidence (NFI), and derives the mathematical relationship among the NFI progressivity index, the tax progressivity index, and the public expenditure progressivity index. The computational methodology is utilized in a fiscal application to United States data. The results indicate that from 1950 to 1970 the movement toward increased progressivity in the federal expenditure structure was dominated by the combination of the movement toward less progressivity in the state and local expenditure structure, less progressivity in the federal tax structure, and more regressivity in the state and local tax structure. It is shown that from 1950 to 1970 NFI progressivity decreased for all three government levels studied.

The traditional view of the incidence of the property tax is that consumers bear the entire burden of the tax on capital and landowners bear the entire burden of the tax on land if the supply of land is completely inelastic. This article examines the conditions under which the traditional view is valid when a property tax is imposed in a residential city with fixed population and area. Calculations using estimates of the parameters of the model indicate that the traditional view is a good approximation to the absolute or the differential incidence of the propertvitax.

This article examines the hypothesis that more income-elastic tax structures lead to higher levels and rates of growth of public expenditure because of a fiscal illusion effect. Although support for this hypothesis has been garnered at the state and federal level, the effects of tax elasticity on local public expenditures become clouded in light of Tiebout mobility. More elastic tax structures that lead to increased tax burdens over time may result in outmigration and, consequently, lower rates of expenditure growth. Empirical tests of the tax elasticity hypothesis show a negative relation between tax elasticity and local public expenditure levels and growth rates. These results do not deny the validity of the fiscal illusion hypothesis. It may be that the effects of Tiebout mobility outweigh the fiscal illusion effect.

This article draws attention to the kind of externalities that can only be used as inputs for multi-input public goods. It contrasts the effect on relative prices of a corrective Pigovian scheme for these externalities with those for the more familiar types. Implications of the results are suggested .