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The Marginal Cost of Public Funds and Tax Reform in Africa

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  • Auriol, Emmanuelle
  • Walters, Michael

Abstract

In this paper we propose estimates of the marginal cost of public funds (MCF) in 38 African countries. We develop a simple general equilibrium model that can handle taxes on five major tax classes, and can be calibrated with little more than national accounts data. Our base case estimate of the average MCF from marginal increases in all five tax instruments is 1.2. Focusing on the lowest cost tax instruments in each country, commonly the VAT but not always, the average MCF is 1.1. A key feature of our model is explicit recognition of the informal economy. The larger the informal economy, the higher MCFs tend to be. Extending the tax base to include sections of the informal economy by removing some tax exemptions offers the potential for a low MCF source of public funds, and a lowering of MCFs on other tax instruments.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 09-110.

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Date of creation: Nov 2009
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Handle: RePEc:tse:wpaper:22264

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Cited by:
  1. Amarante, Veronica & Manacorda, Marco & Miguel, Edward & Vigorito, Andrea, 2011. "Do Cash Transfers Improve Birth Outcomes? Evidence from Matched Vital Statistics, Social Security and Program Data," IZA Discussion Papers 6231, Institute for the Study of Labor (IZA).
  2. Bevan, David, 2012. "Aid, Fiscal Policy, Climate Change, and Growth," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  3. Christian EBEKE & Hélène EHRHART, 2011. "Does VAT reduce the instability of tax revenues?," Working Papers 201124, CERDI.
  4. Salvador Barrios & Jonathan Pycroft & Bert Saveyn, 2013. "The marginal cost of public funds in the EU: the case of labour versus green taxes," Taxation Papers 35, Directorate General Taxation and Customs Union, European Commission.
  5. Anum Saeed & Adeel Ahmad & Khalid Zaman, 2012. "Validity of the Value Added Tax in the SAARC Region," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 15(45), pages 143-170, September.

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