Public Finance, 2nd Edition

Whether any such counterfactual cost-based experiments for distributing

public goods beneWts are persuasive is undoubtedly a matter of taste. In any

event, no consensus has been achieved in measuring the incidence of public

goods. As we shall see in the remainder of the chapter, economy-wide studies

of incidence that include a public good often focus exclusively on the tax side

of the government budget. Two approaches to the incidence of the public

good are commonplace. One is to simply ignore the eVect of the public good

on utility. The other is to adopt the Aaron±McGuire assumption of identical

preferences with additively separable public goods, and then argue either that

the commonly provided public good cannot lead to a diVerence in welfare

across individuals, or that a unit of public good is equivalent to a unit of

lump-sum income to each consumer. Neither position is consistent with the

expenditure function measure of individual welfare, M[

~

q;

U(

~

X; e)] without

further simplifying assumptions on M.

ECONOMY-WIDE INCIDENCE STUDIES

In 1980, Alan Blinder published a study of the personal distribution of

income in the United States covering the 30-year period from 1947 to

1977.

9

1947 was the year that the federal government began collecting data

on the personal distribution. Blinder's main conclusion was that the distribu-

tion was essentially unchanged during those 30 years, a conclusion that

surprised him given the economic and demographic turmoil during those

years and the rapid growth of the government sector into domestic areas.

The timing of Blinder's study was somewhat ironic, because subsequent

research revealed that the personal distribution of income started to become

more unequal sometime in the mid- to late 1970s, a trend that continued at

least until 1994. Roughly speaking, the families and individuals at the top of

the distribution gained at the expense of those at or near the bottom of

distribution in the 1970s and 1980s. In the early 1990s, those at the top gained

relative to everyone else.

The two very diVerent trends in the personal distribution of income in the

last half of the century ignited a huge body of research on the determinants of

the distribution. Public sector economists have contributed to this research

agenda with a variety of economy-wide tax incidence studies that attempt to

measure the impact of the Wve major U.S. taxes on the personal distribu-

tion.

10

They are, in descending order of importance ($ billions, 1999, the last

9

A. Blinder, ``The Level and Distribution of Economic Well-Being,'' in M. Feldstein, Ed.,

The American Economy in Transition, University of Chicago Press, Chicago, 1980, pp. 415±479.

10

The incidence of public expenditures has not received the same attention, with the

exception of Social Security and public assistance transfer payments. Similar trends in the

distribution in the other developed market economies have led to the same kinds of incidence

studies of their major taxes.

17. EXPENDITURE INCIDENCE AND ECONOMY-WIDE INCIDENCE STUDIES 585