The marginal cost of public funds: Hours of work versus labor force participation

Kleven, Henrik Jacobsen; Kreiner, Claus Thustrup

doi:10.1016/j.jpubeco.2006.03.006

Cited by 211 publications

(204 citation statements)

References 18 publications

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“…Second, Kleven and Kreiner (2006) extend the literature on the marginal cost of public funds-based on the traditional definition-to account for extensive-margin distortions in labor supply, besides intensive-margin distortions. They argue that participation distortions tend to raise the marginal cost of public funds.…”

Section: Implications For Other Public Policiesmentioning

confidence: 99%

The marginal cost of public funds is one at the optimal tax system

Jacobs

2018

Int Tax Public Finance

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This paper develops a Mirrlees framework with skill and preference heterogeneity to analyze optimal linear and nonlinear redistributive taxes, optimal provision of public goods, and the marginal cost of public funds (MCF). It is shown that the MCF equals one at the optimal tax system, for both lump-sum and distortionary taxes, for linear and nonlinear taxes, and for both income and consumption taxes. By allowing for redistributional concerns, the marginal excess burden of distortionary taxes is shown to be equal to the marginal distributional gain at the optimal tax system. Consequently, the modified Samuelson rule should not be corrected for the marginal cost of public funds. Outside the optimum, the marginal cost of public funds for distortionary taxes can be either smaller or larger than one. The findings of this paper have potentially important implications for applied tax policy and social cost-benefit analysis. Keywords

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Section: Implications For Other Public Policiesmentioning

confidence: 99%

The marginal cost of public funds is one at the optimal tax system

Jacobs

2018

Int Tax Public Finance

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“…From the empirical applications in Kleven and Kreiner (2006) and Immervoll et al (2007), it has become clear how important it is to fully account for heterogeneity both at the individual level and at the extensive margin of labour supply when estimating the MCF. Indeed, initial MCF models were computed using macro indicators or representative agents alone, and were often restricted to proportional tax systems (e.g.…”

Section: Introductionmentioning

confidence: 99%

“…Hansson and Stuart (1985) and Dahlby (1998), among others, extended the concept to marginal changes in progressive, piece-wise linear tax systems. Finally, Kleven & Kreiner (2006) also brought the extensive margin of labour supply on board when estimating the MCF. Since Saez (2002) it is well known that this is a crucial margin of response to determine the distortions introduced by taxes and benefits.…”

Section: Introductionmentioning

confidence: 99%

A Bird's Eye View on 20 Years of Tax-Benefit Reforms in Belgium

Decoster¹,

Perelman

Vandelannoote

et al. 2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractBelgium has seen major changes in its tax-benefit system over the past twenty years. These changes have, to a large extent, co-determined the evolution of disposable incomes of Belgian households on one hand, and their incentives to work on the other. In this paper we assess equity and efficiency aspects of changes in tax-benefit policies over the full course of 1992-2012. By simulating effects of current and past tax-benefit policies using the microsimulation model MEFISTO-EUROMOD, we summarize the shifts in policy orientation over this period using two summary measures of redistribution and work incentives. Our three main findings are: 1) the changes in the tax-benefit system have to a large extent been pro-poor, and redistribution has been increased; 2) the introduction of an earned income tax credit and the lowering of personal income taxes has contributed to improve work incentives, but this effect was partially eroded by an increase in unemployment benefits since 2000; 3) the results crucially depend on whether one chooses as 'no policy change' counterfactual indexation with inflation or indexation with nominal wage growth.JEL: C81, H21, H41, J20

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“…To the extent that the observed tax schedule is non-optimal, Hendren (2014) demonstrates that the analysis can be seen as the exercise of quantifying the marginal cost of taxation at different points of the income distribution, taking into account the behavioral responses to taxation (as captured by intensive and extensive margins of labor supply) as well as the local shape of the income distribution. The recovered weights can then be used to test the local optimality of the tax system in the spirit of the tax reform literature (see, e.g., Kleven and Kreiner 2006;Saez and Stantcheva 2016 for recent applications). See also Lorenz and Sachs (2016) for a related analysis with an application to Germany.…”

Section: Related Literaturementioning

confidence: 99%

Political preferences for redistribution in Sweden

Bastani

Lundberg

2017

J Econ Inequal

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We examine preferences for redistribution inherent in Swedish tax policy during 1971-2012 using the inverse optimal tax approach. The income distribution is carefully characterized with the help of administrative register data, and we employ behavioral elasticities reflecting the perceived distortionary effects of taxation. The revealed social welfare weights are high for non-workers, small for low-income earners, and hump-shaped around the median. At the top, they are always negative, especially so during the high-tax years of the 1970s and '80s. The weights on non-workers increased sharply in the 1970s, fell drastically in the late '80s and early '90s, and have since then increased.

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The marginal cost of public funds: Hours of work versus labor force participation

Cited by 211 publications

References 18 publications

The marginal cost of public funds is one at the optimal tax system

The marginal cost of public funds is one at the optimal tax system

A Bird's Eye View on 20 Years of Tax-Benefit Reforms in Belgium

Political preferences for redistribution in Sweden

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