The Marginal Equity-Adjusted Cost of Public Funds

Katinka Kristine Holtsmark and Åsmund Sunde Valseth

No 12228, CESifo Working Paper Series from CESifo

Abstract: To evaluate the marginal welfare effects of taxation and of public spending, we must account for both distortionary and distributional effects. The distributional consequences of taxation, in terms of welfare, cannot be fully captured in in the measures currently used in the literature, such as the Marginal Costs of public Funds (MCF) or the the Marginal Value of Public Funds (MVPF). We propose a measure for these welfare effects and define the Marginal Equity-Adjusted Cost of Public Funds (MECF). The MECF can be applied to any tax instrument and for any set of welfare weights. The MECF enables comparison of the marginal welfare effects of tax instruments with different tax incidence. We derive the MECF in a stylized model with linear taxation and provision of a public good. Finally, we define the analogous measure for the marginal welfare effects of public spending, and derive the Marginal Equity-Adjusted Value of Public Funds (MEVF). The MEVF enables comparison of the value of spending with different beneficiaries.

Keywords: marginal cost of public funds; income inequality; lump-sum taxes; public good provision (search for similar items in EconPapers)
JEL-codes: H20 H40 H50 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-pbe and nep-pub
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