The perception of the economic values of public versus private goods is directly tied to the concept of taxation. Throughout the 20-21st century, the number of public goods was significantly increased in the majority of developed and developing countries in order to provide not only various government services but also public services including infrastructure, education, medical care, shelters, maternity leaves, financial support for poor and unemployed, and many others. The government receives its payments in taxes, which it then spends on providing various public goods. Striking a balance between taxation, public services, and economic growth is a difficult task. The purpose of this paper is to evaluate public and private goods through the prism of optimal tax theory.
Differences between Public and Private Goods
Before connecting the concepts of public and private goods to the existing measures of taxation, it is important to understand what they are. The proposed definitions are as follows:
- Public goods. These are goods that are not limited and that individuals cannot be denied under any circumstances. Public goods are non-tradable and non-rival, meaning that individuals will not need to compete with one another to receive them. Some of the examples of public goods include the education system, as all children in the majority of countries are guaranteed the right to education (Unger, Van der Linde, & Getzner, 2017).
- Private goods. The majority of goods currently available on the market are private goods. These goods are rival, meaning that if a unit of a good is consumed, the amount available to the rest decreases by one. A private good is also excludable, suggesting that potential customers can be excluded from receiving the good based on certain parameters, such as wealth (Unger et al., 2017).
As it is possible to see, public and private goods tend to follow the trends of their respective markets. However, due to the interconnectedness of the market, private goods find their way into the public sector and the other way around.
Optimal Taxes as a Means of Balancing Public and Private Goods
In a market economy, the provision of private goods and services is the main driving force behind prosperity and growth. Successful companies and businesses provide most of tax revenues, which can later be spent on purchasing public goods and supporting society. For private goods, taxes represent a negative externality, as they come from outside of a business and impact it in a negative way. At the same time, larger taxes mean more money will be spent on public goods, so for them, taxes present a positive externality.
Optimal taxes theory is a theory that suggests determining an optimal way and measure of taxation to maximize public welfare while subjecting it to the realities of the market economy. In other words, taxes must provide all of the necessary public goods while keeping economic growth within acceptable margins. According to the theory, a fair tax rate is based on four criteria (Saez & Stantcheva, 2018):
- A tax must be proportionate to an ability to pay;
- The amount of taxation is always a certainty;
- Taxpayers must be able to choose the times and convenient ways of paying the tax;
- Administration, collection, and control procedures must be simplified.
According to this theory, if the estimations are done right, the most appropriate type of tax for government intervention is a flat tax (Saez & Stantcheva, 2018).
Conclusions
Public goods, private goods, and taxes are interconnected, as the latter acts as a positive extremity and a negative one at the same time. Private goods have an indirect effect on the number of finances available to public goods and a direct influence on economic growth. Private goods, on the other hand, indirectly increase economic growth and directly affect the public sector. The tax rate can be used to prioritize one over the other, or attempt to find a balance, as suggested by the optimal taxes theory.
References
Saez, E., & Stantcheva, S. (2018). A simpler theory of optimal capital taxation. Journal of Public Economics, 162, 120-142.
Unger, B., Van der Linde, D., & Getzner, M. (Eds.). (2017). Public or pivate hoods? Cheltenham, UK: Edward Elgar Publishing.