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The Marginal Equity-Adjusted Cost of Public Funds

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  • Katinka Kristine Holtsmark
  • Åsmund Sunde Valseth

Abstract

To evaluate the marginal welfare effects of taxation and of public spending, we must account for both distortionary and distributional effects. The distributional consequences of taxation, in terms of welfare, cannot be fully captured in in the measures currently used in the literature, such as the Marginal Costs of public Funds (MCF) or the the Marginal Value of Public Funds (MVPF). We propose a measure for these welfare effects and define the Marginal Equity-Adjusted Cost of Public Funds (MECF). The MECF can be applied to any tax instrument and for any set of welfare weights. The MECF enables comparison of the marginal welfare effects of tax instruments with different tax incidence. We derive the MECF in a stylized model with linear taxation and provision of a public good. Finally, we define the analogous measure for the marginal welfare effects of public spending, and derive the Marginal Equity-Adjusted Value of Public Funds (MEVF). The MEVF enables comparison of the value of spending with different beneficiaries.

Suggested Citation

  • Katinka Kristine Holtsmark & Åsmund Sunde Valseth, 2025. "The Marginal Equity-Adjusted Cost of Public Funds," CESifo Working Paper Series 12228, CESifo.
    • Handle: RePEc:ces:ceswps:_12228
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    References listed on IDEAS

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    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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