Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects

Posted: 21 Sep 2001

See all articles by Joel B. Slemrod

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Shlomo Yitzhaki

Hebrew University of Jerusalem - Department of Economics; National Bureau of Economic Research (NBER)

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Abstract

This paper seeks to clarify the extent to which the rule for providing public goods ought to correct for the distortionary cost of raising funds. We argue that, in evaluating public projects, the marginal cost of funds (MCF) concept must be supplemented by a symmetrical concept, which we label the marginal benefit of public projects, or MBP, which indicates the value to individuals of the dollars spent. Each of these concepts can be decomposed into two separate components, one reflecting efficiency and the other characterizing the distributional impact of the project itself or its financing. We conclude that efficiency of the financing cannot be ignored, that distributional considerations are also relevant, and that the availability and optimality of tax instruments is critical for evaluating the appropriateness of proceeding with a public good-cum financing project. However, one can construct special cases, s in Kaplow (1996), where the simple cost-benefit criterion applies.

JEL Classification: H2, H4

Suggested Citation

Slemrod, Joel B. and Yitzhaki, Shlomo, Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects. National Tax Journal, Vol. 54, No. 2, pp. 189-201, June 2001. Available at SSRN: https://ssrn.com/abstract=280012

Joel B. Slemrod (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

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Shlomo Yitzhaki

Hebrew University of Jerusalem - Department of Economics ( email )

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Israel
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