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Bridging the Tax-Expenditure Gap: Green Taxes and the Marginal Cost of Funds

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Author Info
Agnar Sandmo ()
Abstract

The marginal cost of public funds is usually seen as a number greater than one, reflecting the efficiency cost of distortionary taxes. But economic intuition suggests that since green taxes are efficiency-enhancing the MCF with such taxes will be less than one. The paper demonstrates that this intuition is not necessarily true, even when a green tax is the sole source of funds. The analysis also considers the MCF with a proportional income tax, given the presence of green taxes. It compares the optimization approach to the MCF with that of a balanced budget reform and shows that they lead to equivalent results.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 579.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_579

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Find related papers by JEL classification:
D62 - Microeconomics - - Welfare Economics - - - Externalities
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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  1. A. Bovenberg, 1999. "Green Tax Reforms and the Double Dividend: an Updated Reader's Guide," International Tax and Public Finance, Springer, vol. 6(3), pages 421-443, August. [Downloadable!] (restricted)
  2. Mayshar, Joram, 1991. "On Measuring the Marginal Cost of Funds Analytically," American Economic Review, American Economic Association, vol. 81(5), pages 1329-35, December. [Downloadable!] (restricted)
  3. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Blackwell Publishing, vol. 41(1), pages 119-28, January. [Downloadable!] (restricted)
  4. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Oxford University Press, vol. 22(2), pages 227-43, April.
  5. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-98, April. [Downloadable!] (restricted)
  6. Wilson, John Douglas, 1991. "Optimal Public Good Provision with Limited Lump-Sum Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 153-66, March. [Downloadable!] (restricted)
  7. Brendemoen, Anne & Vennemo, Haakon, 1996. " The Marginal Cost of Funds in the Presence of Environmental Externalities," Scandinavian Journal of Economics, Blackwell Publishing, vol. 98(3), pages 405-22.
  8. Ballard, Charles L. & Medema, Steven G., 1993. "The marginal efficiency effects of taxes and subsidies in the presence of externalities : A computational general equilibrium approach," Journal of Public Economics, Elsevier, vol. 52(2), pages 199-216, September. [Downloadable!] (restricted)
  9. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 67(1), pages 105-122, January. [Downloadable!] (restricted)
  10. Christiansen, Vidar, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Blackwell Publishing, vol. 48(3), pages 447-57, July. [Downloadable!] (restricted)
  11. Ballard, Charles L & Fullerton, Don, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-31, Summer. [Downloadable!] (restricted)
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  12. Lars Hokonsen, 1998. "An Investigation into Alternative Representations of the Marginal Cost of Public Funds," International Tax and Public Finance, Springer, vol. 5(3), pages 329-343, July. [Downloadable!] (restricted)
  13. Dreze, Jean & Stern, Nicholas, 1987. "The theory of cost-benefit analysis," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 14, pages 909-989 Elsevier. [Downloadable!] (restricted)
  14. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December. [Downloadable!] (restricted)
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