Premium
Reconsidering the Marginal Welfare Cost of Taxation *
Author(s) -
FREEBAIRN JOHN
Publication year - 1995
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.1995.tb01879.x
Subject(s) - economics , unemployment , marginal cost , elasticity (physics) , welfare , wage , price elasticity of demand , involuntary unemployment , microeconomics , labour economics , labour supply , price elasticity of supply , econometrics , macroeconomics , market economy , materials science , composite material
A model with sticky wage rates and involuntary unemployment is used to compute the marginal cost of taxation, and these estimates are compared with those obtained from the conventional price‐clearing equilibrium model. Important determinants of the marginal cost estimates are the response of sticky wages to a tax increase, the elasticity of demand for labour, and the unemployment gap. By contrast, the conventional model focuses on the elasticity of labour supply. The different models have different implications for efficient tax design. However, the new model generally agrees with the conventional model regarding significant efficiency costs of higher taxation.