Marginal Cost of Public Funds for Different Tax Instruments and Government Expenditures

Abstract

The marginal cost of public funds, that is the size of the direct and indirect (excess burden) costs for marginal tax revenues, is examined in this paper. For an open economy with a savings response and using Swedish 1979 data, the marginal cost of public funds spent on transfer payments is estimated to vary from 1.47 for a distributionally neutral tax on labor and capital to 7.20 for a more progressive tax, where average and marginal labor taxes increase by the same rates. For changes in the most important tax instrument, the marginal cost of public funds varies from 0.98 for expenditures on infrastructure to 2.27 for transfer payments.