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Should Benefit-Cost Analysis Include a Correction for the Marginal Excess Burden of Taxation?

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  • Bos, Frits
  • van der Pol, Thomas
  • Romijn, Gerbert

Abstract

This paper provides an overview of theoretical, empirical, and practical arguments in favor of or against a correction for the marginal excess burden of taxation (MEB). Benefit-cost analysis (BCA) should be used to compare the costs and benefits of a policy measure and its major alternatives, and whenever relevant, also to compare different ways of financing this. The best pragmatic approach is then to assume first that a policy measure is financed out of general tax revenues and then that the MEB of these taxes is broadly counterbalanced by the benefits of redistribution of these taxes. The latter assumption is consistent with the preferences for equality in a country’s current tax system. It is a simple and politically neutral assumption, and it implies that the marginal cost of public funds is equal to 1 and that no correction is needed in BCAs for the MEB. This shortcut assumption does not imply that the tax system is optimal or that BCAs should be distributionally weighted. Choosing an alternative source of financing, i.e., other than general tax revenues, should be regarded as a separate policy measure that should be analyzed separately in a BCA, including its distortionary and distributive effects.

Suggested Citation

  • Bos, Frits & van der Pol, Thomas & Romijn, Gerbert, 2019. "Should Benefit-Cost Analysis Include a Correction for the Marginal Excess Burden of Taxation?," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 10(3), pages 379-403, October.
  • Handle: RePEc:cup:jbcoan:v:10:y:2019:i:3:p:379-403_3
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    Cited by:

    1. Spackman, Michael, 2021. "Social discounting and the cost of public funding in practice," LSE Research Online Documents on Economics 111490, London School of Economics and Political Science, LSE Library.
    2. Timothy N. Cason & John K. Stranlund & Frans P. de Vries, 2022. "Investment Incentives in Tradable Emissions Markets with Price Floors Approach," Purdue University Economics Working Papers 1331, Purdue University, Department of Economics.
    3. Lindgren, Petter Y. & Presterud, Ane Ofstad, 2021. "Expanding the Norwegian Armed Forces in the Time of Corona: Benefit-Cost Analysis in the Context of High Unemployment Rate," MPRA Paper 106405, University Library of Munich, Germany.
    4. Spackman, Michael, 2023. "The social discount rate and the cost of public funds: a search for more consistency and better practice," LSE Research Online Documents on Economics 119814, London School of Economics and Political Science, LSE Library.
    5. Spencer Bastani, 2023. "The Marginal Cost of Public Funds: A Brief Guide," CESifo Working Paper Series 10322, CESifo.

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