The marginal cost of public funds: A comment on the literature

Abstract

The paper derives formulas for the marginal cost of public funds in a general equilibrium model. The MCF depends on how expenditure is financed, and the paper goes through a wide range of possibilities. Special emphasis is put on the most common functional forms of applied general equilibrium models. The formulas are used to explain and correct results and statements in the literature on the marginal cost of public funds. Implications for tax reform are also discussed.