The Marginal Cost of Raising and Redistributing Tax Revenue

The authors present analytic formulas for calculating marginal welfare costs when taxes are levied against the wages of a heterogeneous population of households and marginal tax revenue finances either the supply of a public good or lump-sum transfers. The formulas are applied to explain the wide discrepancy between estimates or marginal welfare costs for redistribution previously obtained through computer simulation procedures. The authors' calculations reveal that these procedures introduced lump-sum transfers that were not specified as part of the reforms to be simulated but explain most of the difference between their estimates.

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	Allgood, Sam Professor of Economics Expertise: Economic Education Labor Economics (wages, employment, working conditions, unions) Managerial Economics Public Finance Economics CBA 369 P.O. Box 880489 University of Nebraska-Lincoln Lincoln, NE 68588-0489, USA Phone: (402) 472-3367 Fax: (402) 472-9700 sallgood1@unl.edu	Allgood, Sam	Economics