Suchergebnisse

No distinction is made between the marginal social cost of public funds (MCF) and the shadow value of government revenue in the public finance literature. Their separate roles are demonstrated in this paper, where the MCF is used as a scaling coefficient to account for changes in tax inefficiency on revenue transfers made to balance the government budget, while the shadow value of government revenue is used as a scaling coefficient to convert efficiency effects into actual changes in utility. We find a revenue effect identified by Atkinson and Stern (1974) and Dahlby (1998) in the shadow value of government revenue which is not present in the MCF. It is the reason why, in the presence of distorting taxes, the shadow value of government revenue can differ from unity, whereas the MCF is always unity, for a lump-sum tax.

This paper proves the Hatta (1977) coefficient is the shadow value of government revenue - it is a scaling coefficient that converts efficiency effects from marginal policy changes into dollar changes in utility. The decomposition is generalised to economies with heterogenous consumers and variable producer prices to show (a) the Foster and Sonnenschein (1970) effect, where extra income reduces consumer utility, makes the shadow value of government revenue negative; and (b) when Bruce and Harris (1982) and Diewert (1983) isolate Pareto improvements they choose patterns of revenue transfers to make the shadow value of government revenue positive for every consumer. We use the decomposition to extend the welfare test in Bruce-Harris by allowing revenue transfers with distorting taxes, and generalise the welfare decomposition of tax inefficiency in Diamond and Mirrlees (1971) by allowing variable producer prices.

When projects are evaluated using a conventional Harberger (1971) cost-benefit analysis the welfare effects are separated with lump-sum transfers. But this does not appear possible when governments raise revenue with distorting taxes. Evidence to support this view can be found in Mayshar (1990) and Wildasin (1984) who derive a marginal social cost of public funds (MCF) that depends on how the government spends the extra revenue raised. Ballard and Fullerton (1992) use this MCF in place of the conventional Harberger (1964) measure to amend the revised Samuelson condition obtained by Pigou (1947). We show that a conventional cost-benefit analysis is possible in this setting by decomposing their revised condition into conventional Harberger terms. The welfare effects of marginally increasing the public good are isolated by hypothetical lump-sum transfers that are offset separately with a distorting tax. We also demonstrate that when the marginal costs and benefits of providing the public good are measured by changes in utility (denominated in units of a chosen numeraire), the income effects are irrelevant because they impact equally on each dollar of cost and benefit. Consequently, projects can be evaluated correctly using uncompensated welfare changes.