Working Paper

Public Safety under Imperfect Taxation (with Nicolas Treich)

In this paper, we examine theoretically the effect of tax system imperfections on the optimal public investment in mortality risk reduction (or public safety). We compare three exogenous tax systems, namely first-best, uniform tax and income tax. Moreover, we consider several sources of imperfections, namely individuals’ heterogeneity in wealth and in risk exposure, and labor supply distortion. We show that the direction of the effect of imperfect taxation critically depends on the source of imperfection as well as on the utility and on survival probability functions. We conclude that imperfect taxation cannot generically justify more or less public safety. There is thus no fundamental reason to always adjust downwards the value of statistical life (VSL) because of imperfect taxation, nor to assume a marginal cost of public funds systematically greater than one for the benefit-cost analysis of public safety projects.