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Journal Article

The Marginal Cost of Public Funds in Growing Economies

Nigar Hashimzade and Gareth D. Myles
Annals of Economics and Statistics
No. 113/114, SPECIAL ISSUE ON THE ECONOMICS OF TAXATION (June 2014), pp. 11-36
Published by: GENES on behalf of ADRES
DOI: 10.15609/annaeconstat2009.113-114.11
Stable URL: http://www.jstor.org/stable/10.15609/annaeconstat2009.113-114.11
Page Count: 26
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The Marginal Cost of Public Funds in Growing Economies
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Abstract

The marginal cost of public funds (MCF) measures the cost to the economy of raising government revenue. The MCF can be used to guide reform of the tax system and to determine an efficient level of government expenditure. It can also be used as an input into cost-benefit analysis. Previous applications of the concept have developed a methodology in the context of a static economy. We develop the methodology of the MCF to extend the concept to growing economies. The extended concept is then applied to variants of the Barro endogenous growth model with a productive public input. The MCF is used to address the choice between labour and capital taxes and to explore the implications of infrastructural spill-overs across regions. JEL: E6, H4, H7. / KEY WORDS: Growth, Externalities, Infrastructure, Public Funds.

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