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Elasticity of Marginal Utility of Consumption: The Equal-Sacrifice Approach Applied for the Czech Republic

Author

Listed:
  • Matej Opatrny

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic
    Environmental Centre, Charles University, Czech Republic)

  • Milan Scasny

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic
    Environmental Centre, Charles University, Czech Republic)

Abstract

We provide the first estimate of the elasticity of marginal utility of consumption, ?, for a post-transition economy in the Central & Eastern European region, the Czech Republic, based on individual-level data. The parameter ? is a crucial component of the social discount rate (SDR), which determines the inter-temporal allocations that are acceptable to society. Using the equal-sacrifice income tax approach, we obtain a central estimate of ? at 1.34, which varies between 1.24 and 1.42 within the study period that covers 2005-2019. Moreover, the estimate of elasticity of marginal utility of consumption differs between various income groups and employment status. Importantly, the magnitude of ? estimate depends on whether social benefits are included into gross income or social and health insurance payments are included in the definition of taxes. Our results suggest that SDR for the Czech Republic may be around 3-5 percent for a reasonable pure rate of time preference and positive forecast for per capita consumption growth.

Suggested Citation

  • Matej Opatrny & Milan Scasny, 2021. "Elasticity of Marginal Utility of Consumption: The Equal-Sacrifice Approach Applied for the Czech Republic," Working Papers IES 2021/03, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2021.
    • Handle: RePEc:fau:wpaper:wp2021_03
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    File URL: https://ies.fsv.cuni.cz/en/veda-vyzkum/working-papers/6391
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    More about this item

    Keywords

    elasticity of marginal utility of consumption; equal-sacrifice approach; income tax schedules; marginal tax rate; social discount rate;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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