An applied general equilibrium model is employed to determine the effects of
including additional services in the sales tax base. This approach allows the
incidence of the base-broadening policy to be determined when all prices and quantities
are variable. The base-broadening policy is a potential Pareto-improvemen, its
differential incidence is progressive, and the policy reduces (increases) the quantity
of labor supplied by the lower (higher) income households. The latter result,
upward-sloping labor supply curves with respect to both the cost of living and the
wage, is surpriseng. The source of this result is that the income effect on labor-leisure
choice of a change in the cost of living is larger than the income effect of a change
in the wage.
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