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On the Marginal Welfare Cost of Taxation

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  • Browning, Edgar K

Abstract

This paper develops a rigorous partial equilibrium analysis of the determinants of margin al welfare cost (MWC) of taxes on labor earnings. It shows that four key parameters interact to determine the magnitude of MWC. Using aggregate data and plausible ranges of values for the parameters, MWC can vary from under 10 percent to more than 300 percent of marginal tax revenue. Intermediate parameter values sugge st MWC is in the 25-50 percent range. However, the more extreme estimates cannot be ruled out on the basis of available evidence, suggesting that MWC cannot yet be Copyright 1987 by American Economic Association.

Suggested Citation

  • Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  • Handle: RePEc:aea:aecrev:v:77:y:1987:i:1:p:11-23
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    References listed on IDEAS

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    1. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 11-44.
    2. Matthew D. Shapiro, 1986. "Investment, Output, and the Cost of Capital," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 111-164.
    3. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
    4. Hendrik S. Houthhakker, 1979. "Growth and Inflation: Analysis by Industry," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 241-257.
    5. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    7. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
    8. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
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