Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Marginal Cost of Public Funds is One

Contents:

Author Info

  • Jacobs, Bas

    ()
    (University Rotterdam)

Abstract

This paper develops a Mirrlees (1971) framework with heterogeneous agents to analyze optimal redistributive taxes, optimal provision of public goods and the marginal cost of public funds (MCF). Standard MCF measures are shown to suffer from three defects: i) The MCF for the (non-individualized) lump-sum tax is generally not equal to one. ii) The MCF for distortionary taxes is not directly related to the marginal excess burden. iii) MCF measures for both lump-sum and distortionary taxes are highly sensitive to the choice of the untaxed numéraire good. These problems are caused by using the private rather than the social marginal value of private income to calculate the MCF, and disappear by using the social marginal value of private income. Moreover, by allowing for redistributional concerns, the marginal excess burden of distortionary taxes equals the marginal distributional gain at the optimal tax system. MCF therefore equals one, both for lump-sum and distortionary taxes, and the modified Samuelson rule should not be corrected for the marginal cost of public funds.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nek.uu.se/Pdf/wp20117ucfs.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Katarina Grönvall)
Download Restriction: no

Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2011:7.

as in new window
Length: 37 pages
Date of creation: 20 Jun 2011
Date of revision:
Handle: RePEc:hhs:uufswp:2011_007

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Email:
Web page: http://www.nek.uu.se/
More information through EDIRC

Related research

Keywords: marginal cost of funds; marginal excess burden; optimal taxation; optimal redistribution; optimal provision of public goods; Samuelson rule;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Feldstein, Martin S, 1972. "Distributional Equity and the Optimal Structure of Public Prices," American Economic Review, American Economic Association, American Economic Association, vol. 62(1), pages 32-36, March.
  2. James J. Heckman & Seong Hyeok Moon & Rodrigo Pinto & Peter A. Savelyev & Adam Yavitz, 2009. "The Rate of Return to the High/Scope Perry Preschool Program," Working Papers, Geary Institute, University College Dublin 200936, Geary Institute, University College Dublin.
  3. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, Elsevier, vol. 70(3), pages 365-382, December.
  4. Stéphane Gauthier & Guy Laroque, 2008. "Separability and public finance," IFS Working Papers, Institute for Fiscal Studies W08/07, Institute for Fiscal Studies.
  5. Laurence JACQUET & Etienne LEHMANN & Bruno VAN DER LINDEN, 2010. "Optimal Redistributive Taxation with both Extensive and Intensive Responses," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2010033, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  6. Sadka, Efraim, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 43(2), pages 261-67, June.
  7. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, Elsevier, vol. 7(2), pages 203-235, April.
  8. Sam Allgood & Arthur Snow, 1998. "The Marginal Cost of Raising Tax Revenue and Redistributing Income," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(6), pages 1246-1273, December.
  9. Slemrod, Joel & Yitzhaki, Shlomo, 2001. "Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects," National Tax Journal, National Tax Association, vol. 54(n. 2), pages 189-202, June.
  10. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(2), pages 283-98, April.
  11. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 55-93.
  12. Boadway, Robin & Keen, Michael, 1993. "Public Goods, Self-Selection and Optimal Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 463-78, August.
  13. Bas Jacobs & Ruud A. de Mooij, 2011. "Pigou Meets Mirrlees: On the Irrelevance of Tax Distortions for the Second-Best Pigouvian Tax," CESifo Working Paper Series 3342, CESifo Group Munich.
  14. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 39(3), pages 297-302, July.
  15. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers, Institute for Fiscal Studies W98/18, Institute for Fiscal Studies.
  16. Guy Laroque, 2004. "Indirect Taxation is Superfluous under Separability and Taste Homogeneity : A Simple Proof," Working Papers, Centre de Recherche en Economie et Statistique 2004-23, Centre de Recherche en Economie et Statistique.
  17. Fischer, Stanley, 1983. "`Optimal fiscal and monetary policy in an economy without capital' by Robert E. Lucas and Nancy L. Stokey," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 95-99.
  18. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 1085-89, September.
  19. Triest, Robert K, 1990. "The Relationship between the Marginal Cost of Public Funds and Marginal Excess Burden," American Economic Review, American Economic Association, American Economic Association, vol. 80(3), pages 557-66, June.
  20. Christiansen, Vidar, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(3), pages 447-57, July.
  21. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, American Economic Association, vol. 61(1), pages 8-27, March.
  22. Joseph E. Stiglitz & Partha Dasgupta, 1970. "Differential Taxation, Public Goods, and Economic Efficiency," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 299, Cowles Foundation for Research in Economics, Yale University.
  23. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 2(1), pages 93-107, May.
  24. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  25. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 22(2), pages 227-43, April.
  26. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  27. P. A. Diamond, 1975. "A Many-Person Ramsey Tax Rule," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 146, Massachusetts Institute of Technology (MIT), Department of Economics.
  28. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(3), pages 117-131, Summer.
  29. Emmanuel Saez, 2000. "The Desirability of Commodity Taxation under Non-Linear Income Taxation and Heterogeneous Tastes," NBER Working Papers 8029, National Bureau of Economic Research, Inc.
  30. Emmanuel Saez, 2000. "Using Elasticities to Derive Optimal Income Tax Rates," NBER Working Papers 7628, National Bureau of Economic Research, Inc.
  31. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, Elsevier, vol. 49(1), pages 47-73, October.
  32. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(1), pages 119-28, January.
  33. Tuomala, Matti, 1984. "On the optimal income taxation : Some further numerical results," Journal of Public Economics, Elsevier, Elsevier, vol. 23(3), pages 351-366, April.
  34. Iván Werning, 2007. "Optimal Fiscal Policy with Redistribution," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 122(3), pages 925-967, 08.
  35. Pirttila, Jukka & Tuomala, Matti, 2001. "On optimal non-linear taxation and public good provision in an overlapping generations economy," Journal of Public Economics, Elsevier, Elsevier, vol. 79(3), pages 485-501, March.
  36. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262042509, December.
  37. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 6(1-2), pages 55-75.
  38. Browning, Edgar K & Johnson, William R, 1984. "The Trade-Off between Equality and Efficiency," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(2), pages 175-203, April.
  39. Lars Hokonsen, 1998. "An Investigation into Alternative Representations of the Marginal Cost of Public Funds," International Tax and Public Finance, Springer, Springer, vol. 5(3), pages 329-343, July.
  40. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Cremer, Helmuth & Roeder, Kerstin, 2011. "Long-term care policy, myopia and redistribution," TSE Working Papers, Toulouse School of Economics (TSE) 12-314, Toulouse School of Economics (TSE), revised May 2012.
  2. Mehlkopf, R.J., 2011. "Risk sharing with the unborn," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4960700, Tilburg University.
  3. Laurence Jacquet & Etienne Lehmann & Bruno Van der Linden, 2010. "Optimal Redistributive Taxation with both Extensive and Intensive Responses," CESifo Working Paper Series 3308, CESifo Group Munich.
  4. Robin Boadway & Pierre Pestieau, 2011. "Indirect Taxes for Redistribution: Should Necessity Goods be Favored?," CESifo Working Paper Series 3667, CESifo Group Munich.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hhs:uufswp:2011_007. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Katarina Grönvall).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.