The MCF from Taxing Labor Income

Abstract

This chapter focuses on the marginal cost of public funds (MCF) from taxing labor income. Taxes on labor income—either levied directly through income, payroll, and social security contributions or indirectly through broadly based sales taxes—represent the most important source of tax revenues in most countries. The discussions cover the MCF for a proportional tax on labor income; the social marginal cost of funds (SMCF) for a progressive wage tax; incorporating labor force participation effects in the MCF; using the elasticity of taxable income to calculate the MCF; the MCF in models of political choice; and studies of the marginal distortionary cost of taxing labor income.