Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/333774 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12228
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
To evaluate the marginal welfare effects of taxation and of public spending, we must account for both distortionary and distributional effects. The distributional consequences of taxation, in terms of welfare, cannot be fully captured in in the measures currently used in the literature, such as the Marginal Costs of public Funds (MCF) or the the Marginal Value of Public Funds (MVPF). We propose a measure for these welfare effects and define the Marginal Equity-Adjusted Cost of Public Funds (MECF). The MECF can be applied to any tax instrument and for any set of welfare weights. The MECF enables comparison of the marginal welfare effects of tax instruments with different tax incidence. We derive the MECF in a stylized model with linear taxation and provision of a public good. Finally, we define the analogous measure for the marginal welfare effects of public spending, and derive the Marginal Equity-Adjusted Value of Public Funds (MEVF). The MEVF enables comparison of the value of spending with different beneficiaries.
Subjects: 
marginal cost of public funds
income inequality
lump-sum taxes
public good provision
JEL: 
H20
H40
H50
Document Type: 
Working Paper
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