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What Does it Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds

Author

Listed:
  • Bev Dahlby

    (University of Alberta)

  • Ergete Ferede

    (Grant MacEwan University)

Abstract

The marginal cost of public funds measures the welfare loss a society incurs in raising an additional dollar of tax revenue. Tax increases distort economic decisions and erode tax bases because of tax avoidance and tax evasion by taxpayers. This Commentary uses econometric estimates of the effects of higher provincial tax rates on the provinces’ corporate income tax, personal income tax, and sales tax bases to calculate the marginal cost of public funds (MCF) for these taxes. The results indicate that the cost of increasing provincial tax revenues through a corporate tax rate increase is very high, and in some provinces, corporate tax rate reductions in 2006 would have increased the present value of the provincial government’s total tax revenues. The results also suggest that significant welfare gains would accrue from reducing provincial corporate income tax rates. As well, increasing provincial corporate and personal income tax rates can cause significant reductions in federal tax revenues because the federal and provincial governments levy taxes on the same tax bases. Finally, Canada’s system of the equalization grants might reduce the perceived MCF of recipient provinces.

Suggested Citation

  • Bev Dahlby & Ergete Ferede, 2011. "What Does it Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 324, March.
  • Handle: RePEc:cdh:commen:324
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Bev Dahlby & Ergete Ferede, 2016. "The stimulative effects of intergovernmental grants and the marginal cost of public funds," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 114-139, February.
    2. Alex Laurin, "undated". "A Reality Check for BC: The Impact of Behavioural Responses on the 2013 Budget's Proposed Income Tax Increases," e-briefs 155, C.D. Howe Institute.
    3. Ian Irvine, 2017. "The Marginal Social Value of Electric Vehicle Subsidies - Preliminary Evidence," Economics Bulletin, AccessEcon, vol. 37(1), pages 137-148.
    4. Benjamin Dachis & William B.P. Robson & Nicholas Chesterley, "undated". "Capital Needed: Canada Needs More Robust Business Investment," e-briefs 179, C.D. Howe Institute.
    5. Salvador Barrios & Serena Fatica & Diego Martinez & Gilles Mourre, 2015. "The fiscal effects of work-related tax expenditures in Europe," European Economy - Economic Papers 2008 - 2015 545, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. repec:clh:resear:v:5:y:2012:i:14 is not listed on IDEAS
    7. Finn Poschmann & Alexandre Laurin, 2011. "The Time is Still Right for BC’s HST," e-briefs 119, C.D. Howe Institute.
    8. Alex Laurin & William Robson, 2013. "Prudence and Opportunity: A Shadow Federal Budget for 2013," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 375, March.
    9. Alexandre Laurin & Finn Poschmann & William B.P. Robson, 2011. "When Striking an Awkward Balance Means Striking Out: Budget 2011," e-briefs 112, C.D. Howe Institute.
    10. repec:clh:briefi:v:9:y:2016:i:15 is not listed on IDEAS
    11. Benjamin Dachis, 2015. "Tackling Traffic: The Economic Cost of Congestion in Metro Vancouver," e-briefs 206, C.D. Howe Institute.
    12. Ben Dachis, 2013. "Cars, Congestion and Costs: A New Approach to Evaluating Government Infrastructure Investment," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 385, July.

    More about this item

    Keywords

    Fiscal and Tax Competitiveness; marginal cost of public funds (MCF);

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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