Possible Advantage of Government Research, Grants and Prizes:  Minimizes deadweight loss through reliance on income-tax funding instead of monopoly pricing

 

Partially offset by another distortion:  By decreasing the benefits of labor, each income tax increase will cause taxpayers to substitute leisure for work, causing economic losses.  Estimates of the magnitude of those losses:

Dominant view:  $.30 - $.50 for every $1 raised in tax revenue

Snow/Warren (1996)

 

Dissenting view:  More than $1 for every $1 raised in tax revenue

Feldstein (1997)

 

This adverse effect will not occur, however, if both:

(a)     tax increase is used to finance production of a public good, and

(b)    incidence of the tax matches incidence of the benefits of the public good

Kaplow (1996; 1998; 2004)