The Social Cost of Government Spending in an Economy with Large Tax Distortions. A CGE Decomposition for Norway

Erling Holmøy and Birger Strøm ()
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Birger Strøm: Statistics Norway, https://www.ssb.no/en/forskning/ansatte

Discussion Papers from Statistics Norway, Research Department

Abstract: We use a CGE model to estimate the social cost of a marginal increase in public expenditure in Norway. Norway exemplifies an economy with high taxes. Distortionary taxes imply wedges between the market prices and the corresponding shadow prices. The shadow prices are unobservable, which is the rationale for using a CGE model to estimate the social cost of government consumption. The social cost is decomposed into a direct resource cost and the cost of public funds. The CGE estimate of the direct resource cost is implicitly a weighted average of different opportunity costs, reflecting distortions in the Norwegian economy. Our estimate of the resource cost equals about ¾ of the ex ante market price of the resources consumed. This gap is due to a positive labour supply response combined with a high effective tax rate on labour income. Our estimate of the social cost of raising public funds through a higher pay-roll tax is about 20 percent of the direct resource cost.

Keywords: Tax distortions; Cost-benefit analysis; Cost of public funds; Computable general equilibrium models (search for similar items in EconPapers)
JEL-codes: H20 H21 H43 J22 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-cmp and nep-pbe
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Citations: View citations in EconPapers (2)

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