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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. repec:rej:journl:v:15:y:2012:i:45:p:143-170 is not listed on IDEAS
  2. Verónica Amarante & Marco Manacorda & Edward Miguel & Andrea Vigorito, 2011. "Do Cash Transfers Improve Birth Outcomes? Evidence from Matched Vital Statistics, Social Security and Program Data," NBER Working Papers 17690, National Bureau of Economic Research, Inc.
  3. Christopher Adam & David Bevan, 2014. "Public Investment, Public Finance, and Growth: The Impact of Distortionary Taxation, Recurrent Costs, and Incomplete Appropriability," IMF Working Papers 14/73, International Monetary Fund.
  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. 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).
  6. Miriam Frey & Zoryana Olekseyuk, 2014. "A general equilibrium evaluation of the fiscal costs of trade liberalization in Ukraine," Empirica, Springer, vol. 41(3), pages 505-540, August.
  7. Michael Clemens, 2014. "A Case against Taxes and Quotas on High-Skill Emigration - Working Paper 363," Working Papers 363, Center for Global Development.
  8. Christian EBEKE & Hélène EHRHART, 2011. "Does VAT reduce the instability of tax revenues?," Working Papers 201124, CERDI.

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