The marginal cost of public funds is one at the optimal tax system

Jacobs, Bas

doi:10.1007/s10797-017-9481-0

Cited by 58 publications

(47 citation statements)

References 51 publications

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“…Comparing this with (19), we see that Proposition 1 applies here as well: if the linear income tax is less progressive than optimal, the necessity good x 2 should be subsidized (or taxed preferentially relative to x 1 . While this analysis focuses solely on the participation decision, it is apparent that if both extensive and intensive responses are included, the results of Proposition 1 would continue to apply.…”

Section: Differential Commodity Taxationmentioning

confidence: 77%

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Indirect taxes for redistribution: Should necessity goods be favored?

Boadway

2016

Research in Economics

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The Atkinson-Stiglitz Theorem shows that with weakly separable preferences, differential commodity taxes are not needed if an optimal nonlinear income tax is imposed. Redistributive objectives can be achieved with the income tax alone even if goods differ considerably in their income elasticities of demand. Deaton showed that if the government is restricted to a linear progressive income tax along with commodity taxes, the latter are superfluous if preferences are not only weakly separable but also yield linear Engel curves whose slopes are common to all households. These have potentially strong policy implications since they suggest that the common practice of giving preferential commodity tax treatment to necessities is not warranted. Using the linear progressive income tax as an example and assuming the Deaton conditions are satisfied, we derive two contradictory results. First, if the income tax is less progressive than optimal, necessities should be taxed preferentially relative to luxuries. Second, if low-income households are income-constrained so are unable to afford any luxury goods, it may be optimal to tax necessity goods at higher rates than luxuries, depending on whether labor supply varies along the intensive or extensive margin. The analysis is extended to allow for nonlinear taxes and endogenous demand for a public good.

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Section: Differential Commodity Taxationmentioning

confidence: 77%

“…The optimal linear income tax rate is obtained when (19) is set to zero. The analogue of Lemma 1 applies.…”

Section: Changing Progressivity With Uniform Commodity Taxationmentioning

confidence: 99%

Indirect taxes for redistribution: Should necessity goods be favored?

Boadway

2016

Research in Economics

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“…We find that disability allowance reduces labor market earnings by $3,300 over three years, and it increases housing values due to an averted foreclosure by roughly $2,400, which is 70 percent of the decrease in earnings. We also calculate the marginal value of public funds (MVPF), which is the ratio of the marginal benefits of a policy to its marginal cost (see Jacobs (2018) for a review). In Appendix F, we use our estimates to calculate the MVPF, as derived by Hendren (2016) and Hendren (2017), incorporating spillovers to third parties and fiscal externalities.…”

Section: Discussionmentioning

confidence: 99%

Disability and Distress: The Effect of Disability Programs on Financial Outcomes

Deshpande

Gross

2019

SSRN Journal

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We provide the first evidence on the relationship between disability programs and markers of financial distress: bankruptcy, foreclosure, eviction, and home sale. Rates of these adverse financial events peak around the time of disability application and subsequently fall for both allowed and denied applicants. To estimate the causal effect of disability programs on these outcomes, we use variation induced by an age-based eligibility rule and find that disability allowance substantially reduces the likelihood of adverse financial events. Within three years of the decision, the likelihood of bankruptcy falls by 0.81 percentage point (30 percent), and the likelihood of foreclosure and home sale among homeowners falls by 1.7 percentage points (30 percent) and 2.5 percentage points (20 percent), respectively. We find suggestive evidence of reductions in eviction rates. Conversely, the likelihood of home purchases increases by 0.86 percentage point (20 percent) within three years. We present evidence that these changes reflect true reductions in financial distress. Considering these extreme events increases the optimal disability benefit amount and suggests a shorter optimal waiting time. * We are grateful to

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“…It definition stresses that the public value of an extra private euro differs from the private value of an extra private euro by amount of the income effects of taxation. This definition of MCPF resolves major problems in the economic literature (see Jacobs, 2018). First, MCPF is 1 if lump-sum taxes are optimized.…”

Section: Marginal Cost Of Public Funds and Distortionary Taxesmentioning

confidence: 93%

Should CBA's Include a Correction for the Marginal Excess Burden of Taxation?

2018

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According to economic theory, taxation drives a wedge between private and public benefits, which distorts labour supply, consumption and investment and leads to loss of welfare. One would therefore expect that in cost-benefit analysis (CBA) of public expenditure a correction is made for the costs of taxation, i.e. for the marginal excess burden of taxation (MEB). However, looking at CBA practice all over the world, textbooks on CBA and various specific CBA guidelines no consensus exists about such a correction. This paper provides for the first time an overview of the theoretical, empirical and practical arguments in favor or against a MEB correction. It argues that in general the best approach for CBA's is to assume that the MEB is broadly counterbalanced by the benefits of redistribution of these taxes. This assumption is consistent with the preferences for equality in a country's current tax system and is a simple, pragmatic and politically neutral assumption. This assumption does not imply that the tax system is optimal or that CBA's should be distributionally weighted. As a consequence, the preferred approach is to assume in general that the marginal cost of public funds is equal to one and then no correction is needed in CBAs for the MEB. Choosing an alternative source of financing, i.e. other than general tax revenues, should be regarded as a separate policy measure that should be analysed separately in a CBA.

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The marginal cost of public funds is one at the optimal tax system

Cited by 58 publications

References 51 publications

Indirect taxes for redistribution: Should necessity goods be favored?

Indirect taxes for redistribution: Should necessity goods be favored?

Disability and Distress: The Effect of Disability Programs on Financial Outcomes

Should CBA's Include a Correction for the Marginal Excess Burden of Taxation?

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