1. On the Treatment of Taxes in a Cost-Benefit Analysis
Per-Olov Johansson
Stockholm School of Economics and
CERE

2. Outline. A simple CBA-rule for a tax-distorted economy.
How is this rule related to:
Marginal Cost of Public Funds?
“Dasgupta-Stiglitz-Atkinson-Stern tradition”.
Marginal Excess Burden of Taxes?
“Harberger-Pigou-Browning tradition”.
On empirical evidence.
An alternative approach.
Mirrlees approach ignored. Applicable?

3. A GE Cost-Benefit rule for a small project;
Public good.
No distortionary taxes. 3
Samuelson (1954)

4. A GE Cost-Benefit rule for a small project;
Distortionary taxes.
“Tax wedge”
Impact of tax on “tax wedges”.
Impact of project on “tax wedges”.
Preferences weakly separable in the project. 4

5. Marginal Cost of Public Funds.
Gahvari (2006)
Monetary welfare cost of raising an additional euro in taxes.
V(.) = indirect utility f.
N(.) = Tax revenues.

6. Marginal Excess Burden of Taxes.
Willingness to pay for avoiding an increase in a tax (related to the change in tax revenue).

7. CGE models often used to estimate MEB.
Multiply project costs by (1 + MEB)?
MEB different thought experiment from a CBA.
Gahvari (2006)
Auerbach and Hines (2002)
Marginal tax increase:
This equality holds for all taxes.

8. Use CGE models to estimate MCPF when there are many different tax instruments.
UK; Spain: MCPF = 1?
Sweden (Transport sector): MCPF = 1.2.

9. Min Max Browning (1976) USA 1.08 1.16 Hansson (1984) Sweden 1.22 2.98
Hansson and Stuart (1985)
1.05
36.40
0.71
2.29
0.78
7.10
Agell et al. (1998)
23.80
Kleven and Kreiner (2003)
OECD
Spain
0.82
1.88 (1.34)
3.41 (1.74)
1+MEB
MCPF
Alonso-Carrera and Manzano (2003), González-Páramo and Sanz Sanz (2004).

10. An Alternative Treatment of Taxes: Looking for reasonable shortcuts.
tw = 0.3.
tw = 0.3.

11. Alonso-Carrera and Manzano (2003) MCPF:
This approach captures MCPF + MCPF
Alonso-Carrera and Manzano (2003) MCPF:
, 1, ,
Sorensen (2010): 1 + MEB:
OECD (Kleven and Kreiner): ,