Discussion Papers no. 908

The costs of taxation in the presence of inequality

This paper provides a new and improved measure of the marginal cost of public funds (MCF). It is based on a benchmark tax which is distributionally neutral and non-distortive.

This is in contrast to the MCF-measure used in the previous literature, that has used the regressive uniform lump-sum tax as the benchmark. Our proposed MCF-measure more precisely accounts for the distributional aspects of public funding (the tax scheme) and makes a clear distinction between this and the distributional aspects of the public good considered. Compared to the previous literature, we find a higher MCF both in the case of a uniform lump-sum tax and in the case of distortive taxes. Due to its regressive distributional consequences, we find that the MCF of a uniform lump-sum tax is always greater than one when not combined with distortive taxes. Moreover, we find that the MCF could be greater than one also with an optimal combination of a uniform lump-sum tax and distortive taxes.

About the publication


The costs of taxation in the presence of inequality


Åsmund Sunde Valseth, Bjart Holtsmark, Katinka Holtsmark

Series and number

Discussion Papers no. 908


Statistisk sentralbyrå


Discussion Papers



Number of pages


About Discussion Papers

Discussion papers comprise research papers intended for international journals and books. A preprint of a Discussion Paper may be longer and more elaborate than a standard journal article as it may include intermediate calculations, background material etc.