An applied general equilibrium assessment of the marginal cost of public funds in Norway

Abstract

The purpose of this paper is to estimate the marginal cost of public funds (MCF) in Norway An econometrically specified large scale applied general equilibrium model of the Norwegian economy is employed to derive the results. The paper considers three types of financing; poll tax, wage income tax and VAT; and seven types of government expenditure. Results indicate that the MCF is above unity in Norway. The wage income tax is more expensive than the poll tax, while the VAT is in between. It is claimed that this particular ranking follows primarily from the preference specification. The female labour supply response is the primary reason why the MCF of a wage income tax is that much higher than the poll tax.