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

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Author Info
Kleven, Henrik Jacobsen
Kreiner, Claus Thustrup
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 CESifo Working Paper No. 935.

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

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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  1. Immervoll H & Kleven H & Kreiner C & Saez E, 2004. "Welfare Reform In European Countries: A Micro Simulation Analysis," EUROMOD Working Papers EM1/04, EUROMOD at the Institute for Social and Economic Research. [Downloadable!]
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  2. Arntz, Melanie & Boeters, Stefan & Gürtzgen, Nicole, 2005. "Alternative Approaches to Discrete Working Time Choice in an AGE Framework," ZEW Discussion Papers 05-62, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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  3. Parry, Ian, 2003. "Fiscal Interactions and the Case for Carbon Taxes over Grandfathered Carbon Permits," Discussion Papers dp-03-46, Resources For the Future. [Downloadable!]
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  4. Proost Stef & Van der Loo Saskia & Andre de Palma & Lindsey Robin, 2005. "A cost-benefit analysis of tunnel investment and tolling alternatives in Antwerp," Energy, Transport and Environment Working Papers Series ete0507, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment. [Downloadable!]
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  5. Stefan Boeters & Michael Feil & Nicole Gürtzgen, 2005. "Discrete Working Time Choice in an Applied General Equilibrium Model," Computational Economics, Springer, vol. 26(3), pages 1-29, November. [Downloadable!] (restricted)
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  6. Clemens Fuest & Andreas Peichl & Thilo Schaefer, 2007. "Is a Flat Tax Feasible in a Grown-up Welfare State?," IZA Discussion Papers 3142, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Schaefer, Thilo & Peichl, Andreas & Fuest, Clemens, 2007. "Is a Flat Tax politically feasible in a grown-up Welfare State?," FiFo-CPE Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 07-6, University of Cologne, CPE - Cologne Center for Public Economics. [Downloadable!]
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