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Bridging the Tax-Expenditure Gap: Green Taxes and the Marginal Cost of Funds

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  • Agnar Sandmo

Abstract

The marginal cost of public funds is usually seen as a number greater than one, reflecting the efficiency cost of distortionary taxes. But economic intuition suggests that since green taxes are efficiency-enhancing the MCF with such taxes will be less than one. The paper demonstrates that this intuition is not necessarily true, even when a green tax is the sole source of funds. The analysis also considers the MCF with a proportional income tax, given the presence of green taxes. It compares the optimization approach to the MCF with that of a balanced budget reform and shows that they lead to equivalent results.

Suggested Citation

  • Agnar Sandmo, 2001. "Bridging the Tax-Expenditure Gap: Green Taxes and the Marginal Cost of Funds," CESifo Working Paper Series 579, CESifo.
  • Handle: RePEc:ces:ceswps:_579
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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