Reconciling alternative views about the appropriate social discount rate
This paper shows that, in an economy with an exogenous rate of return and a given capital income tax distortion, and with lump sum taxes as the marginal tax instrument, the SOC and MCF criteria both correctly identify all worthwhile projects if the criteria are properly applied. The equivalence between the SOC and MCF criteria continues to hold i) if distortionary taxes are used to balance the budget, and ii) if the rate of return to capital is endogenous. Apparent differences between the SOC and MCF criteria arise from different definitions of a project's indirect revenue effect. Neither criterion has an implementation advantage because the information requirements for each are identical.
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