Abstract

https://ssrn.com/abstract=1805108
 
 

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What Does it Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds


Bev Dahlby


University of Alberta - Department of Economics

Ergete Ferede


MacEwan University

March 16, 2011

C.D. Howe Institute

Abstract:     
The marginal cost of public funds measures the welfare loss a society incurs in raising an additional dollar of tax revenue. Tax increases distort economic decisions and erode tax bases because of tax avoidance and tax evasion by taxpayers. This Commentary uses econometric estimates of the effects of higher provincial tax rates on the provinces’ corporate income tax, personal income tax, and sales tax bases to calculate the marginal cost of public funds (MCF) for these taxes.

The results indicate that the cost of increasing provincial tax revenues through a corporate tax rate increase is very high, and in some provinces, corporate tax rate reductions in 2006 would have increased the present value of the provincial government’s total tax revenues. The results also suggest that significant welfare gains would accrue from reducing provincial corporate income tax rates. As well, increasing provincial corporate and personal income tax rates can cause significant reductions in federal tax revenues because the federal and provincial governments levy taxes on the same tax bases. Finally, Canada’s system of the equalization grants might reduce the perceived MCF of recipient provinces.

Number of Pages in PDF File: 20

Keywords: Fiscal and Tax Competitiveness, marginal cost of public funds (MCF)

JEL Classification: H21, H71


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Date posted: April 8, 2011  

Suggested Citation

Dahlby, Bev and Ferede, Ergete, What Does it Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds (March 16, 2011). C.D. Howe Institute. Available at SSRN: https://ssrn.com/abstract=1805108 or http://dx.doi.org/10.2139/ssrn.1805108

Contact Information

Bev Dahlby (Contact Author)
University of Alberta - Department of Economics ( email )
8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada
403-492-5437 (Phone)
Ergete Ferede
MacEwan University ( email )
P.O. Box 1796
Rm 7-360E
Edmonton, Alberta T5J4S2
Canada
780 633 3647 (Phone)
(780) 497-4781 (Fax)
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