Bridging the Tax-Expenditure Gap: Green Taxes and the Marginal Cost of Funds

Agnar Sandmo

No 579, CESifo Working Paper Series from CESifo

Abstract: The marginal cost of public funds is usually seen as a number greater than one, reflecting the efficiency cost of distortionary taxes. But economic intuition suggests that since green taxes are efficiency-enhancing the MCF with such taxes will be less than one. The paper demonstrates that this intuition is not necessarily true, even when a green tax is the sole source of funds. The analysis also considers the MCF with a proportional income tax, given the presence of green taxes. It compares the optimization approach to the MCF with that of a balanced budget reform and shows that they lead to equivalent results.

Date: 2001
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Working Paper: Bridging the Tax-Expenditure Gap: Green Taxes and the Marginal Cost of Funds (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_579

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