Marginal Cost of Public Funds under the Presence of Informality

Ceyhun Elgin, Orhan Torul and Tugce Turk ()
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Tugce Turk: University of Chicago

Hacienda Pública Española / Review of Public Economics, 2022, vol. 241, issue 2, 79-103

Abstract: In this paper, we investigate the behavior of the marginal cost of public funds (MCF) for different taxes under the presence of informality. We build a dynamic general equilibrium model with formal and informal sectors and allow the government to use consumption, capital, and labor income taxes to raise revenue. Using country-level data on taxes, we calibrate and measure MCF for a cross-section of economies. Our results show that different taxes have distinct cost responses to changes in the informal sector size in each country: while MCF of the consumption tax decreases with the increase in the informal sector size, the MCF of the income taxes, capital and labor, display an opposite behavior. Moreover, omitting the informal sector results in an underestimation in the MCF of capital income tax and overestimation in that of the consumption tax

Keywords: Informal economy; Taxation; Marginal cost of the public funds; Dynamic general equilibrium model (search for similar items in EconPapers)
JEL-codes: E26 H26 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Marginal Cost of Public Funds under the Presence of Informality (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hpe:journl:y:2022:v:241:i:2:p:79-103

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