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The marginal cost of public funds in closed and small open economies

  • Giuseppe Ruggieri
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    The efficiency cost of taxation has become an increasingly important consideration in the evaluation of alternative tax policy options. This paper provides a review of estimates of the efficiency costs of taxation and presents some new estimates for small open economies. The available studies suggest that, in closed economies, the distortions from taxation are highest for corporate taxes and lowest for wage taxes. This efficiency ranking of different taxes does not hold in small open economies. It is shown that, in a small open economy, this ranking is reversed. Personal income taxes are less distortionary than wage taxes primarily because the link between domestic saving and investment is severed. Corporate taxes are also less distortionary for a variety of factors, such as changes in depreciation levels, payments to foreigners and terms of trade.

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    Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

    Volume (Year): 20 (1999)
    Issue (Month): 1 (March)
    Pages: 41-60

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    Handle: RePEc:ifs:fistud:v:20:y:1999:i:1:p:41-60
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    1. Stuart, Charles E, 1984. "Welfare Costs per Dollar of Additional Tax Revenue in the United States," American Economic Review, American Economic Association, vol. 74(3), pages 352-62, June.
    2. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-98, April.
    3. Ballard, Charles L., 1990. "Marginal welfare cost calculations : Differential analysis vs. balanced-budget analysis," Journal of Public Economics, Elsevier, vol. 41(2), pages 263-276, March.
    4. Fullerton, Don & Henderson, Yolanda Kodrzycki, 1989. "The Marginal Excess Burden of Different Capital Tax Instruments," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 435-42, August.
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