On Measuring the Marginal Cost of Funds Analytically

As suggested by Browning (1976), for the purpose of evaluating public projects, it is the welfare cost of the marginal tax dollar that matters. Wildasin (1984) argued that estimates of the marginal cost of funds (MCF) depend on the particular spending program that uses marginal funds. He considered...

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Bibliographic Details
Published in:The American economic review 1991-12, Vol.81 (5), p.1329-1335
Main Author: Mayshar, Joram
Format: Article
Language:English
Subjects:
Consumer spending
Cost benefit analysis
Costs
Economic models
Economic statistics
Economic theory
Equilibrium
Fiscal policy
Income taxes
Labor supply
Marginal costs
Marginal revenue
Reforms
Spending
Studies
Tax benefits
Tax reform
Tax revenues
Taxation
Taxation economics
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Summary:As suggested by Browning (1976), for the purpose of evaluating public projects, it is the welfare cost of the marginal tax dollar that matters. Wildasin (1984) argued that estimates of the marginal cost of funds (MCF) depend on the particular spending program that uses marginal funds. He considered 2 benchmark alternatives: 1. when the marginal dollar is used in a neutral government project, and 2. when the marginal revenue is rebated as a lump-sum transfer to taxpayers. Stuart (1984) generalized Wildasin's framework by considering a 2-sector general-equilibrium model and by introducing nonlinear taxation of labor income. However, he presented only simulated estimates of MCF. The literature has mushroomed, with simulated results from diverse computable general-equilibrium models and an attempt by Browning (1987) to provide analytic formulas for the case when income taxation is nonlienar, but in a partial-equilibrium setting. In the present analysis, it is demonstrated that analytic tractability can be achieved without resorting to a partial-equilibrium analysis.
ISSN:0002-8282
1944-7981