Working Paper: CEPR ID: DP9772
Authors: Torben M. Andersen; Claus Thustrup Kreiner
Abstract: If productivity increases more slowly for services than for manufactured goods, then services suffer from Baumol?s cost disease and tend to become relatively more costly over time. Since the welfare state in all countries is an important supplier of tax financed services, this translates into a financial pressure which seems to leave policymakers with a trilemma; increase taxes (and hence tax distortions), cut spending or redistribute less. Under the assumptions underlying Baumol?s cost disease, we show that these dismal implications are not warranted. The welfare state is sustainable and Baumol growth leaves scope for Pareto improvements.
Keywords: publicly provided goods; redistribution; tax distortions; welfare state sustainability
JEL Codes: H21; H4; H5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Baumol's cost disease (E31) | increased costs in the provision of public services (H49) |
| increased costs in the provision of public services (H49) | financial pressure on the welfare state (H53) |
| Baumol's growth (O49) | adjustments in taxation (H20) |
| adjustments in taxation (H20) | maintenance of utility distribution across income levels (D39) |
| Baumol's growth (O49) | sustainability of the welfare state (I31) |