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The Marginal Cost of Public Funds in Developing Countries: An Application to 38 African Countries

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  • Auriol, Emmanuelle
  • Warlters, Michael

Abstract

In this paper we propose estimates of the marginal cost of public funds (MCF) in 38 African countries. We develop a simple general equilibrium mode inspired by the “1-2-3” model of Devarajan et al. (1994) that can handle taxes on the five major tax classes, takes account of the informal sector, and can be calibrated with little more than national accounts data. Sensitivity analysis suggests that our base case estimates are reasonably robust for purposes of tax reform. Contrary to conventional wisdom, differences in MCF are not strongly related to the wealth of the country. We hence show that a reasonable estimate of the average MCF in Africa is 1.17. On the other hand, there is a strong relationship between the size of the informal sector and the value of MCF. Moreover on average taxes on factors have high MCFs and taxes on imports and domestic goods have low MCFs. This suggests that welfare could be improved by increased reliance on VATs and reduced reliance on exports and factor taxes, and by reducing red tape barriers to business entry into the formal sector.
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Suggested Citation

  • Auriol, Emmanuelle & Warlters, Michael, 2007. "The Marginal Cost of Public Funds in Developing Countries: An Application to 38 African Countries," IDEI Working Papers 371, Institut d'Économie Industrielle (IDEI), Toulouse.
  • Handle: RePEc:ide:wpaper:4375
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    References listed on IDEAS

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    1. Benge, M., 1999. "Marginal Excess Burdens of Taxes on Capital and on Labour Income in a Small Open Economy," Papers 364, Australian National University - Department of Economics.
    2. Shaghil Ahmed & Dean Croushore, 1996. "The Marginal Cost of Funds With Nonseparable Public Spending," Public Finance Review, , vol. 24(2), pages 216-236, April.
    3. Odd-Helge Fjeldstad, 2002. "Fighting fiscal corruption: The case of the Tanzania Revenue Authority," CMI Working Papers WP 2002:3, CMI (Chr. Michelsen Institute), Bergen, Norway.
    4. Campbell, H F & Bond, K A, 1997. "The Cost of Public Funds in Australia," The Economic Record, The Economic Society of Australia, vol. 73(220), pages 22-34, March.
    5. Bernard Gauthier & Ritva Reinikka, 2006. "Shifting Tax Burdens through Exemptions and Evasion: an Empirical Investigation of Uganda," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 15(3), pages 373-398, September.
    6. Abdelhak Senhadji, 1998. "Time-Series Estimation of Structural Import Demand Equations: A Cross-Country Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 236-268, June.
    7. Auriol, Emmanuelle & Warlters, Michael, 2005. "Taxation base in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 625-646, April.
    8. 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 352-362, June.
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    Cited by:

    1. Auriol, Emmanuelle & Blanc, Aymeric, 2009. "Capture and corruption in public utilities: The cases of water and electricity in Sub-Saharan Africa," Utilities Policy, Elsevier, vol. 17(2), pages 203-216, June.
    2. Auriol, Emmanuelle & Schilizzi, Steven G.M., 2015. "Quality signaling through certification in developing countries," Journal of Development Economics, Elsevier, vol. 116(C), pages 105-121.
    3. Antonio Estache & Liam Wren-Lewis, 2009. "Toward a Theory of Regulation for Developing Countries: Following Jean-Jacques Laffont's Lead," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 729-770, September.
    4. Edward Tower & Yifan Victor Ye, 2016. "How Taxes And Real Wage Inflexibility Interact To Make Trade Deficits Addictive: The Tertiary And Quaternary Burdens Of A Transfer," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(02), pages 1-15, June.
    5. Antonio Estache & L. Wren-Lewis, 2008. "Towards a Theory of Regulation for Developing Countries: Following Laffont's Lead," Working Papers ECARES 2008_018, ULB -- Universite Libre de Bruxelles.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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