Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-27T19:32:26.556Z Has data issue: false hasContentIssue false
  • English
  • Français

Should Benefit-Cost Analysis Include a Correction for the Marginal Excess Burden of Taxation?

Published online by Cambridge University Press:  09 August 2019

Frits Bos Open the ORCID record for Frits Bos [Opens in a new window] ,
Thomas van der Pol Open the ORCID record for Thomas van der Pol [Opens in a new window]  and
Gerbert Romijn
Frits Bos*
Affiliation:
The Council of the Dutch State, the Netherlands, e-mail: [email protected]
Thomas van der Pol
Affiliation:
Global Climate Forum, Germany
Gerbert Romijn
Affiliation:
CPB Netherlands Bureau for Economic Policy Analysis, the Netherlands
*
*e-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper provides an overview of theoretical, empirical, and practical arguments in favor of or against a correction for the marginal excess burden of taxation (MEB). Benefit-cost analysis (BCA) should be used to compare the costs and benefits of a policy measure and its major alternatives, and whenever relevant, also to compare different ways of financing this. The best pragmatic approach is then to assume first that a policy measure is financed out of general tax revenues and then that the MEB of these taxes is broadly counterbalanced by the benefits of redistribution of these taxes. The latter assumption is consistent with the preferences for equality in a country’s current tax system. It is a simple and politically neutral assumption, and it implies that the marginal cost of public funds is equal to 1 and that no correction is needed in BCAs for the MEB. This shortcut assumption does not imply that the tax system is optimal or that BCAs should be distributionally weighted. Choosing an alternative source of financing, i.e., other than general tax revenues, should be regarded as a separate policy measure that should be analyzed separately in a BCA, including its distortionary and distributive effects.

Keywords

benefit-cost analysisdistributionally weighted BCAHicks-Kaldor criterionmarginal cost of public fundsmarginal excess burden of taxation.D61H20H43.
Type
Article
Information
Journal of Benefit-Cost Analysis , Volume 10 , Issue 3 , Fall 2019 , pp. 379 - 403
Copyright
© Society for Benefit-Cost Analysis, 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acemoglu, Daron, and Golosov, Michael. 2010, “Dynamic Mirrlees Taxation under Political Economy Constraints.” The Review of Economic Studies, 77: 841–881.Google Scholar
Asian Development Bank. 2013, Cost-Benefit Analysis for Development: A Practical Guide. ADB, Philippines.Google Scholar
Atkinson, Anthony B., and Stern, Nicolas H.. 1974, “Pigou, Taxation and Public Goods.” The Review of Economic Studies, 41: 119–128.Google Scholar
Ballard, C. L., and D., Fullerton 1992, “Distortionary taxes and the provision of public goods.” Journal of Economic Perspectives, 6(3) 117–131.Google Scholar
Bickel, Peter, Friedrich, Rainer, Burgess, Arnaud, and Fagiani, Patrizia. 2006. “Proposal for Harmonised Guidelines.” HEATCO (Developing Harmonised European Approaches for Transport Costing and Project Assessment, 2006), deliverable 5, EC-project HEATCO.Google Scholar
Boadway, Robin. 1976. “Integrating Equity and Efficiency in Applied Welfare Economics.” The Quarterly Journal of Economics, 90(4): 541–556.Google Scholar
Boadway, Robin, and Keen, Michael. 1993. “Public Goods, Self-Selection and Optimal Income Taxation.” International Economic Review, 34: 463–478.Google Scholar
Boardman, Anthony E., Greenberg, David H., Vining, Aidan R., and Weimer, David L.. 2006. Cost-Benefit Analysis: Concepts and Practice. 3rd ed.Upper Saddle River, NJ: Pearson.Google Scholar
Bos, Frits. 2006. Nederlandse Collectieve Uitgaven in Historisch Perspectief. CPB Document number 109. CPB, The Hague.Google Scholar
Bos, Frits. 2008. “The Dutch Fiscal Framework: History, Current Practice and the Role of the CPB.” OECD Journal on Budgeting, 8(1): 7–48.Google Scholar
Bos, Frits, and Teulings, Coen. 2012. The World’s Oldest Fiscal Watchdog: CPB’s Analyses Foster Consensus on Economic Policy. CPB Discussion Paper 2007.Google Scholar
Bos, Frits, and Teulings, Coen. 2013. Short and Long-Term Forecasting by The Netherlands Bureau for Economic Policy Analysis (CPB): Science, Witchcraft or Practical Tool for Policy? OECD Journal of Budgeting, 13/1, 45–56.Google Scholar
Bos, Frits, and Zwaneveld, Peter. 2017. Cost-Benefit Analysis for Flood-Risk Management and Water Governance in The Netherlands: An Overview of One Century. CPB Background Paper.Google Scholar
Burgess, David F. 2013. “Reconciling Alternative Views about the Appropriate Social Discount Rate.” Journal of Public Economics, 97: 9–17.Google Scholar
Bourguignon, FranÓois and Amedeo, Spadaro. 2012. “Tax–benefit revealed social preferences,” The Journal of Economic Inequality, Springer; Society for the Study of Economic Inequality, vol. 10(1), pages 75–108, March.Google Scholar
Burgess, David F., and Zerbe, Richard. 2011. “Appropriate Discounting for Benefit-Cost Analysis.” Journal of Benefit-Cost Analysis, 2: 1–20.Google Scholar
Conover, Christopher J. 2010. Congress Should Account for the Excess Burden of Taxation. Policy Analysis No. 669, October 13, 2010, CATO Institute.Google Scholar
Dahlby, Bev. 2008. The Marginal Cost of Public Funds: Theory and Applications. Cambridge: MIT Press.Google Scholar
De Nooij, Michiel and Carl, Koopmans. 2004. “Vergeten kosten van projecten.” ESB, 90(4442), 444–445.Google Scholar
Diamond, P. A., and Mirrlees, J. A. 1971. “Optimal taxation and public production I: Production efficiency.” American Economic Review, 61(1), 8–27.Google Scholar
Diamond, Peter A. 1975. “A many-person Ramsey tax rule.” Journal of Public Economics, 4(4), 335–342.Google Scholar
European Commission. 2014. Guide to Cost-Benefit Analysis of Investment Project. Economic Appraisal tool for Cohesion Policy 2014-2020.Google Scholar
Florio, Massimo. 2014. Applied Welfare Economics: Cost-Benefit Analysis of Projects and Policies. New York: Routledge.Google Scholar
Florio, Massimo, and Colautti, Sara. 2005. “A Logistic Growth Theory of Public Expenditures: A Study of Five Countries Over 100 Years.” Public Choice, 122: 355–393.Google Scholar
Harberger, Arnold C. 1978. “On the Use of Distributional Weights in Social Cost-Benefit Analysis.” Journal of Political Economy, 86(2): S87–S120.Google Scholar
Harberger, Arnold C. 2007. Suggested New Steps Towards the Practical Implementation of Cost-Benefit Analysis. Working Paper.Google Scholar
Heaton, Paul. 2010. Hidden in Plain Sight: What Cost-of-Crime Research Can Tell Us about Investing in Police. RAND Corporation, Santa Monica.Google Scholar
Heckman, James J., Moon, Seong H., Pinto, Rodrigo, Savelyev, Peter A., and Yavitz, Adam. 2010. “The Rate of Return to the High Scope Perry Preschool Program.” Journal of Public Economics, 94, 114–128.Google Scholar
Hendren, Nathaniel. 2014. The Inequality Deflator: Interpersonal Comparisons without a Social Welfare Function. NBER Working Paper 20351.Google Scholar
Jacobs, Bas, 2015. De prijs van gelijkheid. Amsterdam: Prometheus.Google Scholar
Jacobs, Bas. 2018. “The Marginal Cost of Public Funds is One at the Optimal Tax System.” International Tax and Public Finance, 25(4): 883–912. https://doi.org/10.1007/s10797-017-9481-0Google Scholar
Jacobs, Bas, and Mooij, Ruud de. 2009a. “De marginale kosten van publieke fondsen zijn gelijk aan één.” ESB, 94: 532–535.Google Scholar
Jacobs, Bas, and de Mooij, Ruud. 2009b. “Naschrift op: De marginale kosten van publieke fondsen zijn gelijk aan één.” ESB, 94: 669.Google Scholar
Jacobs, Bas, de Mooij, Ruud, and Armstrong, Alex. 2009. De prijs van de overheid, Den Haag: CPB.Google Scholar
Kaplow, Louis. 1996. “The Optimal Supply of Public Goods and the Distortionary Cost of Taxation.” National Tax Journal, 49(4): 513–533.Google Scholar
Kaplow, Louis. 2004. “On the (Ir) Relevance of Distribution and Labor Supply Distortion to Public Goods Provision and Regulation.” Journal of Economic Perspectives, 18: 159–175.Google Scholar
Kleven, Henrik J., and Kreiner, Claus T.. 2003. The Marginal Cost of Public Funds in OECD Countries: Hours of Work versus Labor Force Participation. CESIFO Working Paper 935.Google Scholar
Koopmans, Carl, and Nooij, Michel de. 2009. “Reactie op: De marginale kosten van publieke fondsen zijn gelijk aan één.” ESB, 94: 605.Google Scholar
Little, Ian., and James, Mirrlees. 1974. Project appraisal and planning for developing countries. Basic books, New York.Google Scholar
Mirrlees, James A. 1971. “An Exploration in the Theory of Optimum Income Taxation.” Review of Economic Studies, 38: 175–208.Google Scholar
Mishan, Ezra J., and Quah, Euton. 2007. Cost-Benefit Analysis. 5th ed.New York: Routledge.Google Scholar
OECD. 2006. Cost-Benefit Analysis and the Environment: Recent Developments. OECD, Paris.Google Scholar
Okun, Arthur. 1975. Equality and Efficiency: The Big Trade-Off. Brookings Institution Press (Re-print 2015).Google Scholar
OMB (US Office of Management and Budget). 1992. Circular A-94: Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs, Washington, DC.Google Scholar
Pigou, Arthur C. 1920. The Economics of Welfare. 4th ed.London: MacMilan, Vol. 1952Google Scholar
Pigou, Arthus C. 1928. A Study in Public Finance. 3rd ed.London: MacMilan, Vol. 1947.Google Scholar
Romijn, Gerbert, and Renes, Gusta. 2013. General Guidance for Cost-Benefit Analysis. The Hague: CPB/PBL. https://www.cpb.nl/sites/default/files/publicaties/download/cba-guidance.pdf.Google Scholar
Samuelson, Paul A. 1954. “The Pure Theory of Public Expenditure.” Review of Economics and Statistics, 36: 387–389.Google Scholar
Sandmo, Agnar. 1998. “Redistribution and the Marginal Cost of Public Funds.” Journal of Public Economics, 70: 365–382.Google Scholar
Sandmo, Agnar. 2011. Economics Evolving; A History of Economic Thought. Princeton: Princeton University Press.Google Scholar
Slemrod, Joel and Yitzhaki, Shlomo. 2001. “Integrating Expenditure and Tax Decisions: the Marginal Cost of Funds and the Marginal Benefit of Projects.” National Tax Journal, 54(2): 189–202.Google Scholar
Stiglitz, Joseph E. and Partha S., Dasgupta 1971. “Differential Taxation, Public Goods, and Economic Efficiency,” Review of Economic Studies, Vol. 38 pp. 151–174. https://doi.org/10.2307/2296778Google Scholar
Treasury, H.M. 2011. The Green Book: Appraisal and Evaluation in Central Government Treasury Guidance. London: TSO.Google Scholar
Van der Pol, Thomas, Bos, Frits, and Romijn, Gerbert. 2017. Distributionally Weighted Cost-Benefit Analysis: From Theory to Practice. CPB Discussion Paper. An earlier draft was presented at the 9th Conference of the Society for Benefit-Cost Analysis, March 15–17, 2017, Washington, DC.Google Scholar
Van ’t Riet, Maarten. 2016. Een kleine geschiedenis van de theorie van kosten-batenanalyse. CPB-memo.Google Scholar
Water Resources Council. 1983. Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies. Washington, DC: U.S. Government Printing Office.Google Scholar
Werkgroep Kosten van belastingheffing en MKBA’s. 2017. Kosten van Belastingheffing. Baten van Inkomensherverdeling en MKBA’s, Report to the Dutch Government.Google Scholar
World Bank. 1994. Operational Manual OP 10.04 Economic Evaluation of Investment Operations. World Bank, Washington D.C.Google Scholar
World Bank. 2010. Cost-Benefit Analysis in World Bank Projects. World Bank, Washington D.C.Google Scholar
Zerbe, Richard, Davis, Tyler B., Garland, Nancy, and Scott, Tyler. 2010. Towards Principles and Standards in the Use of Benefit-Cost Analysis: A Summary of Work. Report by the Benefit-Cost Analysis Center.Google Scholar
Zoutman, Floris T., Jacobs, Bas and Jongen, Egbert L.W.. 2016. Redistributive Politics and the Tyranny of the Middle Class. Tinbergen Institute, TI 2016-032/VI.Google Scholar