The costs of taxation in the presence of inequality

Åsmund Sunde Valseth, Katinka Holtsmark () and Bjart Holtsmark

Discussion Papers from Statistics Norway, Research Department

Abstract: This paper provides a new and improved measure of the marginal cost of public funds (MCF). It is based on a benchmark tax which is distributionally neutral and non-distortive. This is in contrast to the MCF-measure used in the previous literature, that has used the regressive uniform lump-sum tax as the benchmark. Our proposed MCF-measure more precisely accounts for the distributional aspects of public funding (the tax scheme) and makes a clear distinction between this and the distributional aspects of the public good considered. Compared to the previous literature, we find a higher MCF both in the case of a uniform lump-sum tax and in the case of distortive taxes. Due to its regressive distributional consequences, we find that the MCF of a uniform lump-sum tax is always greater than one when not combined with distortive taxes. Moreover, we find that the MCF could be greater than one also with an optimal combination of a uniform lump-sum tax and distortive taxes.

Keywords: Marginal cost of public funds; lump-sum taxes; public goods (search for similar items in EconPapers)
JEL-codes: H20 H40 H50 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2019-06
New Economics Papers: this item is included in nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:ssb:dispap:908

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