The Marginal Cost of Public Funds in Developing Countries: An Application to 38 African Countries
AbstractIn this paper we propose estimates of the marginal cost of public funds (MCF) in 38 African countries. We develop a simple general equilibrium mode inspired by the “1-2-3” model of Devarajan et al. (1994) that can handle taxes on the five major tax classes, takes account of the informal sector, and can be calibrated with little more than national accounts data. Sensitivity analysis suggests that our base case estimates are reasonably robust for purposes of tax reform. Contrary to conventional wisdom, differences in MCF are not strongly related to the wealth of the country. We hence show that a reasonable estimate of the average MCF in Africa is 1.17. On the other hand, there is a strong relationship between the size of the informal sector and the value of MCF. Moreover on average taxes on factors have high MCFs and taxes on imports and domestic goods have low MCFs. This suggests that welfare could be improved by increased reliance on VATs and reduced reliance on exports and factor taxes, and by reducing red tape barriers to business entry into the formal sector.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6007.
Date of creation: Dec 2006
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Other versions of this item:
- Auriol, Emmanuelle & Warlters, Michael, 2007. "The Marginal Cost of Public Funds in Developing Countries: An Application to 38 African Countries," IDEI Working Papers 371, Institut d'Économie Industrielle (IDEI), Toulouse.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
This paper has been announced in the following NEP Reports:
- NEP-AFR-2007-01-02 (Africa)
- NEP-ALL-2007-01-02 (All new papers)
- NEP-PBE-2007-01-02 (Public Economics)
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