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The Marginal Cost of Public Funds in OECD Countries. Hours of Work Versus Labor Force Participation

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  • Henrik Jacobsen Kleven
  • Claus Thustrup Kreiner

Abstract

A central finding of the modern labor market literature is that labor supply responses tend to be concentrated along the extensive margin (labor force participation) rather than the intensive margin (hours of work). Yet, the literature on the marginal cost of public funds (MCF) focuses solely on the intensive margin. In this paper we demonstrate that it is important to incorporate extensive labor supply responses into the analysis. Firstly, MCF becomes a function of average taxes, rather than just marginal taxes. Secondly, participation decisions and thus MCF depend on the magnitude of transfers for those out of work. Our calculations for 23 OECD countries reveal that the MCF becomes substantially higher once the participation e.ect is accounted for. This is especially the case for continental European countries where average taxes are high and benefit systems are generous.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 935.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_935

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Citations

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Cited by:
  1. Immervoll, Herwig & Kleven, Henrik & Kreiner, Claus Thustrup & Saez, Emmanuel, 2004. "Welfare Reform in European Countries: A Micro-Simulation Analysis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4324, C.E.P.R. Discussion Papers.
  2. André De Palma & Robin Lindsey & Stef Proost & Saskia Van der Loo, 2005. "A cost-benefit analysis of tunnel investment and tolling alternatives in Antwerp," ERSA conference papers ersa05p732, European Regional Science Association.
  3. Gürtzgen, Nicole & Feil, Michael & Boeters, Stefan, 2004. "Discrete Working Time Choice in an Applied General Equilibrium Model," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 04-20, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Arntz, Melanie & Boeters, Stefan & Gürtzgen, Nicole, 2005. "Alternative Approaches to Discrete Working Time Choice in an AGE Framework," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 05-62, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Parry, Ian, 2003. "Fiscal Interactions and the Case for Carbon Taxes over Grandfathered Carbon Permits," Discussion Papers, Resources For the Future dp-03-46, Resources For the Future.
  6. Carmona, Miguel, 2010. "The regulatory function in public-private partnerships for the provision of transport infrastructure," Research in Transportation Economics, Elsevier, Elsevier, vol. 30(1), pages 110-125.
  7. Peichl, Andreas, 2008. "The Benefits of Linking CGE and Microsimulation Models: Evidence from a Flat Tax Analysis," IZA Discussion Papers 3715, Institute for the Study of Labor (IZA).
  8. Copenhagen Economics, 2010. "Company Car Taxation," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 22, Directorate General Taxation and Customs Union, European Commission.
  9. Ethan M.J. Lieber & Lee M. Lockwood, 2013. "Costs and Benefits of In-Kind Transfers: The Case of Medicaid Home Care Benefits," Working Papers, University of Michigan, Michigan Retirement Research Center wp294, University of Michigan, Michigan Retirement Research Center.
  10. Schaefer, Thilo & Peichl, Andreas & Fuest, Clemens, 2007. "Is a Flat Tax politically feasible in a grown-up Welfare State?," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 07-6, University of Cologne, FiFo Institute for Public Economics.
  11. Dominique Gusbin & Inge Mayeres & Maud Nautet, 2009. "Working Paper 14-09 - Analyse de l’impact de différents schémas théoriques d’une taxe routière en Belgique," Working Papers 0914, Federal Planning Bureau, Belgium.
  12. Fuest, Clemens & Peichl, Andreas & Schaefer, Thilo, 2007. "Is a Flat Tax Feasible in a Grown-up Welfare State?," IZA Discussion Papers 3142, Institute for the Study of Labor (IZA).
  13. Michael Kloss & Oskar Krohmer, 2012. "Zur Ermittlung der Selbstfinanzierungsquote von staatlichen Förderprogrammen," ifo Dresden berichtet, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 19(03), pages 05-11, 06.

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