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The Marginal Cost of Redistribution

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  • Edgar K. Browning

    (Texas A&M University)

Abstract

The marginal cost of redistribution is the real economic cost to upper-income households per dollar of benefit to lower-income households; it exceeds 1 because of the efficiency costs of redistributive policies. This article examines the determinants of this marginal cost for linear income tax and negative income tax policies. It develops analytical expressions to calculate marginal cost that show how it depends on initial marginal tax rates, the degree of inequality, and labor supply elasticities. For plausible parameter values, marginal cost is estimated to be quite high; the article also offers an intuitive explanation for this result. The possibility of using different policies that redistribute income at lower cost is discussed.

Suggested Citation

  • Edgar K. Browning, 1993. "The Marginal Cost of Redistribution," Public Finance Review, , vol. 21(1), pages 3-32, January.
    • Handle: RePEc:sae:pubfin:v:21:y:1993:i:1:p:3-32
    DOI: 10.1177/109114219302100101
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    References listed on IDEAS

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    1. Joel Slemrod & Nikki Sorum, 1984. "The Compliance Cost of the U.S. Individual Income Tax System," NBER Working Papers 1401, National Bureau of Economic Research, Inc.
    2. Browning, Edgar K & Johnson, William R, 1984. "The Trade-Off between Equality and Efficiency," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 175-203, April.
    3. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    4. Ballard, Charles L, 1988. "The Marginal Efficiency Cost of Redistribution," American Economic Review, American Economic Association, vol. 78(5), pages 1019-1033, December.
    5. Fullerton, Don, 1991. "Reconciling Recent Estimates of the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 302-308, March.
    6. Efraim Sadka, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(2), pages 261-267.
    7. Feldstein, Martin, 1973. "On the optimal progressivity of the income tax," Journal of Public Economics, Elsevier, vol. 2(4), pages 357-376.
    8. Hansson, Ingemar & Stuart, Charles, 1985. "Tax revenue and the marginal cost of public funds in Sweden," Journal of Public Economics, Elsevier, vol. 27(3), pages 331-353, August.
    9. Eytan Sheshinski, 1972. "The Optimal Linear Income-tax," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 39(3), pages 297-302.
    10. Johnson, William R & Browning, Edgar K, 1983. "The Distributional and Efficiency Effects of Increasing the Minimum Wage: A Simulation," American Economic Review, American Economic Association, vol. 73(1), pages 204-211, March.
    11. Davies, James B & St-Hilaire, France & Whalley, John, 1984. "Some Calculations of Lifetime Tax Incidence," American Economic Review, American Economic Association, vol. 74(4), pages 633-649, September.
    12. Sadka, Efraim, 1976. "Social Welfare and Income Distribution," Econometrica, Econometric Society, vol. 44(6), pages 1239-1251, November.
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    Cited by:

    1. Edgar K. Browning, 1996. ""The Marginal Cost of Redistribution": Reply," Public Finance Review, , vol. 24(1), pages 63-74, January.
    2. Filip Palda, 1997. "Fiscal Churning and Political Efficiency," Kyklos, Wiley Blackwell, vol. 50(2), pages 189-206, May.
    3. Hanushek, Eric A. & Leung, Charles Ka Yui & Yilmaz, Kuzey, 2003. "Redistribution through education and other transfer mechanisms," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1719-1750, November.
    4. Matthew J. Cushing & Mary G. McGarvey, 2003. "The Efficiency of Race- and Gender-Targeted Income Transfers," Public Finance Review, , vol. 31(5), pages 455-486, September.
    5. Krawczyk, Michal, 2010. "A glimpse through the veil of ignorance: Equality of opportunity and support for redistribution," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 131-141, February.
    6. Bev G. Dahley & Giuseppe C. Ruggeri, 1996. ""The Marginal Cost of Redistribution": Comment," Public Finance Review, , vol. 24(1), pages 44-62, January.
    7. Edgar K. Browning, 2002. "The Case Against Income Redistribution," Public Finance Review, , vol. 30(6), pages 509-530, November.

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