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Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects

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  • Joel Slemrod
  • Shlomo Yitzhaki

Abstract

This paper seeks to clarify the extent to which the rule for providing public goods ought to correct for the distortionary cost of raising funds. We argue that, in evaluating public projects, the marginal cost of funds (MCF) concept must be supplemented by a symmetrical concept, which we label the marginal benefit of public projects, or MBP, which indicates the value to individuals of the dollars spent. Each of these concepts can be decomposed into two separate components, one reflecting efficiency and the other characterizing the distributional impact of the project itself or its financing. We conclude that efficiency of the financing cannot be ignored, that distributional considerations are also relevant, and that the availability and optimality of tax instruments is critical for evaluating the appropriateness of proceeding with a public good-cum financing project. However, one can construct special cases, as in Kaplow (1996), where the simple cost-benefit criterion applies.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8196.

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Date of creation: Mar 2001
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Handle: RePEc:nbr:nberwo:8196

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  1. Feldstein, Martin, 1997. "How Big Should Government Be?," National Tax Journal, National Tax Association, vol. 50(2), pages 197-213, June Cita.
  2. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
  3. Joel Slemrod & Shlomo Yitzhaki, 1995. "The Costs of Taxation and the Marginal Cost of Funds," IMF Working Papers 95/83, International Monetary Fund.
  4. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 67(1), pages 105-122, January.
  5. Feldstein, Martin, 1997. "How Big Should Government Be?," Scholarly Articles 3043427, Harvard University Department of Economics.
  6. Mayshar, Joram, 1990. "On measures of excess burden and their application," Journal of Public Economics, Elsevier, vol. 43(3), pages 263-289, December.
  7. Ng, Yew-Kwang, 2000. "The Optimal Size of Public Spending and the Distortionary Cost of Taxation," National Tax Journal, National Tax Association, vol. 53(n. 2), pages 253-72, June Cita.
  8. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.
  9. Yitzhaki, Shlomo, 1979. "A Note on Optimal Taxation and Administrative Costs," American Economic Review, American Economic Association, vol. 69(3), pages 475-80, June.
  10. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Western Economic Association International, vol. 22(2), pages 227-43, April.
  11. Yew-Kwang Ng, 2000. "The Optimal Size of Public Spending and the Distortionary Cost of Taxation," Monash Economics Working Papers archive-19, Monash University, Department of Economics.
  12. Squire, Lyn, 1980. "On the Use of Distributional Weights in Social Cost-Benefit Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1048-49, October.
  13. Robert J. Brent, 1984. "Use of Distributional Weights in Cost-Benefit Analysis: a Survey of Schools," Public Finance Review, , vol. 12(2), pages 213-230, April.
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  15. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  16. Slemrod, Joel, 1998. "Methodological Issues in Measuring and Interpreting Taxable Income Elasticities," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 773-88, December .
  17. Wilson, John Douglas, 1991. "Optimal Public Good Provision with Limited Lump-Sum Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 153-66, March.
  18. Hettich,Walter & Winer,Stanley L., 2005. "Democratic Choice and Taxation," Cambridge Books, Cambridge University Press, number 9780521021807, November.
  19. Hettich, W. & Winer, S.L., 1993. "The Political Economy of Taxation," Papers 8, Carleton - Business Administration.
  20. Feldstein, Martin S, 1972. "Distributional Equity and the Optimal Structure of Public Prices," American Economic Review, American Economic Association, vol. 62(1), pages 32-36, March.
  21. Layard, Richard, 1980. "On the Use of Distributional Weights in Social Cost-Benefit Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1041-47, October.
  22. Martin Feldstein, 1996. "How Big Should Government Be?," NBER Working Papers 5868, National Bureau of Economic Research, Inc.
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