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The Marginal Cost of Public Funds and Tax Reform in Africa

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  • Auriol, Emmanuelle
  • Walters, 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 model that can handle taxes on five major tax classes, and can be calibrated with little more than national accounts data. Our base case estimate of the average MCF from marginal increases in all five tax instruments is 1.2. Focusing on the lowest cost tax instruments in each country, commonly the VAT but not always, the average MCF is 1.1. A key feature of our model is explicit recognition of the informal economy. The larger the informal economy, the higher MCFs tend to be. Extending the tax base to include sections of the informal economy by removing some tax exemptions offers the potential for a low MCF source of public funds, and a lowering of MCFs on other tax instruments.

Suggested Citation

  • Auriol, Emmanuelle & Walters, Michael, 2009. "The Marginal Cost of Public Funds and Tax Reform in Africa," TSE Working Papers 09-110, Toulouse School of Economics (TSE).
  • Handle: RePEc:tse:wpaper:22264
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    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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