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The Marginal Cost of Public Funds Is the Ratio of Mean Income to Median Income

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  • Dan Usher

    (Queen's University)

Abstract

This article is a proof and critique of the theorem in its title. The marginal cost of public funds is the relative price of dollars in the hands of the government, with dollars in the hands of the public as the numeraire. It is the appropriate mark-up of benefit over cost for public sector projects and programs. With no deadweight loss in taxation, the marginal cost of public funds would have to be one. It exceeds one to account for the deadweight loss from taxpayers'maneuvers to reduce the tax they pay: tax evasion, substitution of leisure for labor, and so on. It is the ratio of mean to median income when public expenditure and taxation are arranged in the interest of the median voter.

Suggested Citation

  • Dan Usher, 2006. "The Marginal Cost of Public Funds Is the Ratio of Mean Income to Median Income," Public Finance Review, , vol. 34(6), pages 687-711, November.
  • Handle: RePEc:sae:pubfin:v:34:y:2006:i:6:p:687-711
    DOI: 10.1177/1091142106289173
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    References listed on IDEAS

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    9. Browning, Edgar K. & Liu, Liqun, 1998. "The Optimal Supply of Public Goods and the Distortionary Cost of Taxation: Comment," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(1), pages 103-116, March.
    10. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
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    12. Dahlby, Bev, 1998. "Progressive taxation and the social marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 67(1), pages 105-122, January.
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    Cited by:

    1. K. W Kevin Hsu & C. C. Yang, 2008. "Political Economy And The Social Marginal Cost Of Public Funds: The Case Of The Meltzer‐Richard Economy," Economic Inquiry, Western Economic Association International, vol. 46(3), pages 401-410, July.
    2. Jan Hanousek & Filip Palda, 2009. "Is there a displacement deadweight loss from tax evasion? Estimates using firm surveys from the Czech Republic," Economic Change and Restructuring, Springer, vol. 42(3), pages 139-158, August.
    3. Yeti Nisha Madhoo & Shyam Nath, 2014. "Beneficiary charges: The Cinderella of subnational finance," Chapters, in: Richard M. Bird & Jorge Martinez-Vazquez (ed.), Taxation and Development: The Weakest Link?, chapter 11, pages 364-402, Edward Elgar Publishing.
    4. Dan Usher, 2014. "How High Might The Revenue-maximizing Tax Rate Be?," Working Paper 1334, Economics Department, Queen's University.

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    More about this item

    Keywords

    marginal cost of public funds; median voter; shadow price; lump sum taxation;
    All these keywords.

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods

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