IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/8196.html
   My bibliography  Save this paper

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

Author

Listed:
  • Joel Slemrod
  • Shlomo Yitzhaki

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

  • Joel Slemrod & Shlomo Yitzhaki, 2001. "Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects," NBER Working Papers 8196, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8196
    Note: PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w8196.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    5. Yitzhaki, Shlomo, 1979. "A Note on Optimal Taxation and Administrative Costs," American Economic Review, American Economic Association, vol. 69(3), pages 475-480, June.
    6. Squire, Lyn, 1980. "On the Use of Distributional Weights in Social Cost-Benefit Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1048-1049, October.
    7. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.
    8. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-597, September.
    9. Hettich,Walter & Winer,Stanley L., 2005. "Democratic Choice and Taxation," Cambridge Books, Cambridge University Press, number 9780521021807.
    10. 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.
    11. A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 119-128.
    12. Hettich, W. & Winer, S.L., 1993. "The Political Economy of Taxation," Papers 8, Carleton - Business Administration.
    13. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    14. Ng, Yew-Kwang, 2000. "The Optimal Size of Public Spending and the Distortionary Cost of Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(2), pages 253-272, June.
    15. Mayshar, Joram, 1990. "On measures of excess burden and their application," Journal of Public Economics, Elsevier, vol. 43(3), pages 263-289, December.
    16. Slemrod, Joel, 1998. "Methodological Issues in Measuring and Interpreting Taxable Income Elasticities," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(4), pages 773-788, December.
    17. 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.
    18. Feldstein, Martin, 1997. "How Big Should Government Be?," National Tax Journal, National Tax Association, vol. 50(2), pages 197-213, June.
    19. Mr. Joel Slemrod & Shlomo Yitzhaki, 1995. "The Costs of Taxation and the Marginal Cost of Funds," IMF Working Papers 1995/083, International Monetary Fund.
    20. 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.
    21. Feldstein, Martin S, 1972. "Distributional Equity and the Optimal Structure of Public Prices," American Economic Review, American Economic Association, vol. 62(1), pages 32-36, March.
    22. Robert J. Brent, 1984. "Use of Distributional Weights in Cost-Benefit Analysis: a Survey of Schools," Public Finance Review, , vol. 12(2), pages 213-230, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Johansson-Stenman, Olof, 2001. "Should We Use Distributional Weights in CBA When Income Taxes Can Deal with Equity?," Working Papers in Economics 35, University of Gothenburg, Department of Economics.
    2. Bas Jacobs, 2018. "The marginal cost of public funds is one at the optimal tax system," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 883-912, August.
    3. Ming Chung Chang & Shufen Wu, 2011. "Should Marginal Cost of Public Funds include the Revenue Effect?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(I), pages 1-16, March.
    4. Will Martin & James E. Anderson, 2005. "Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects," Boston College Working Papers in Economics 617, Boston College Department of Economics.
    5. Wendner, Ronald & Goulder, Lawrence H., 2008. "Status effects, public goods provision, and excess burden," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 1968-1985, October.
    6. Åsmund Sunde Valseth & Katinka Holtsmark & Bjart Holtsmark, 2019. "The costs of taxation in the presence of inequality," Discussion Papers 908, Statistics Norway, Research Department.
    7. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470, Elsevier.
    8. Parry, Ian, 2000. "Comparing the Marginal Excess Burden of Labor, Gasoline, Cigarette and Alcohol Taxes: An Application to the United Kingdom," Discussion Papers dp-00-33-rev, Resources For the Future.
    9. José Manuel González-Páramo, "undated". "Midiendo El Coste Marginal En Bienestar De Una Reforma Impositiva," Working Papers 32-02 Classification-JEL , Instituto de Estudios Fiscales.
    10. 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.
    11. Mickaël Beaud & Thierry Blayac & Patrice Bougette & Soufiane Khoudmi & Philippe Mahenc & Stéphane Mussard, 2013. "Estimation du coût d'opportunité des fonds publics pour l'économie française," Working Papers halshs-01077141, HAL.
    12. Agnar Sandmo, 2001. "Bridging the Tax-Expenditure Gap: Green Taxes and the Marginal Cost of Funds," CESifo Working Paper Series 579, CESifo.
    13. Bas Jacobs, 2010. "The Marginal Cost of Public Funds is One," CESifo Working Paper Series 3250, CESifo.
    14. Jacobs, Bas & de Mooij, Ruud A., 2015. "Pigou meets Mirrlees: On the irrelevance of tax distortions for the second-best Pigouvian tax," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 90-108.
    15. Ian Parry, 2002. "Tax Deductions and the Marginal Welfare Cost of Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(5), pages 531-552, September.
    16. Liu, Liqun, 2003. "A marginal cost of funds approach to multi-period public project evaluation: implications for the social discount rate," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1707-1718, August.
    17. Olof Johansson-Stenman, 2005. "Distributional Weights in Cost-Benefit Analysis—Should We Forget about Them?," Land Economics, University of Wisconsin Press, vol. 81(3).
    18. Parry, Ian W.H., 1999. "Tax Deductions, Consumption Distortions, and the Marginal Excess Burden of Taxation," Discussion Papers 10801, Resources for the Future.
    19. Ming Chung Chang & Hsiao-Ping Peng & Yan-Ching Ho, 2016. "The Social Marginal Cost Curve and a Corner Solution of the Second-Best Level of Public Good Provision: A Review and an Extension," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 152(3), pages 209-241, July.
    20. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.

    More about this item

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:8196. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.