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Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects

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  • Slemrod, Joel
  • Yitzhaki, Shlomo

Abstract

This paper seeks to clarify the extent to which the rule for providing public goods ought to correct for the distortionary cost of raising funds. We argue that, in evaluating public projects, the marginal cost of funds (MCF) concept must be supplemented by a symmetrical concept, which we label the marginal benefit of public projects, or MBP, which indicates the value to individuals of the dollars spent. Each of these concepts can be decomposed into two separate components, one reflecting efficiency and the other characterizing the distributional impact of the project itself or its financing. We conclude that efficiency of the financing cannot be ignored, that distributional considerations are also relevant, and that the availability and optimality of tax instruments is critical for evaluating the appropriateness of proceeding with a public good-cum financing project. However, one can construct special cases, as in Kaplow (1996), where the simple cost-benefit criterion applies.

Suggested Citation

  • Slemrod, Joel & Yitzhaki, Shlomo, 2001. "Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(2), pages 189-202, June.
  • Handle: RePEc:ntj:journl:v:54:y:2001:i:2:p:189-202
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    References listed on IDEAS

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    1. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Western Economic Association International, vol. 22(2), pages 227-243, April.
    2. Slemrod, Joel, 1998. "Methodological Issues in Measuring and Interpreting Taxable Income Elasticities," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 773-88, December.
    3. Feldstein, Martin, 1997. "How Big Should Government Be?," National Tax Journal, National Tax Association;National Tax Journal, vol. 50(2), pages 197-213, June.
    4. Harberger, Arnold C, 1980. "Reply to Layard and Squire [On the Use of Distributional Weights in Social Cost-Benefit Analysis]," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1050-1052, October.
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    7. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-597, September.
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    9. Wilson, John Douglas, 1991. "Optimal Public Good Provision with Limited Lump-Sum Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 153-166, March.
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    19. Layard, Richard, 1980. "On the Use of Distributional Weights in Social Cost-Benefit Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1041-1047, October.
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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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