Redistribution and the Marginal Cost of Public Funds
CES Working Paper at Univ. of Munich No. 142
Posted: 3 Mar 1998
Date Written: September 1997
Discussions of the marginal cost of public funds with distortionary taxation are often cast in the framework of a one-consumer economy, while the main justification of distortionary taxes is that they are needed for redistribution. This paper analyzes the issue in a model with heterogeneous consumers and a linear income tax, focusing on the tradeoff between labor market distortions and the redistribution from high-wage to low-wage workers. In an optimal tax system the MCF will be the same for all sources of funds and under certain assumptions less than one. Without optimality the MCF will in general differ between different sources of finance.
JEL Classification: D61, H21, H41
Suggested Citation: Suggested Citation