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The Marginal Cost of Public Funds in Closed and Small Open Economies
Author(s) -
Ruggeri Giuseppe
Publication year - 1999
Publication title -
fiscal studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.63
H-Index - 40
eISSN - 1475-5890
pISSN - 0143-5671
DOI - 10.1111/j.1475-5890.1999.tb00003.x
Subject(s) - economics , depreciation (economics) , small open economy , wage , tax deferral , open economy , ranking (information retrieval) , investment (military) , monetary economics , personal income , income tax , macroeconomics , labour economics , microeconomics , state income tax , tax reform , public economics , gross income , monetary policy , capital formation , exchange rate , law , computer science , machine learning , financial capital , political science , politics , profit (economics)
The efficiency cost of taxation has become an increasingly important consideration in the evaluation of alternative tax policy options. This paper provides a review of estimates of the efficiency costs of taxation and presents some new estimates for small open economies. The available studies suggest that, in closed economies, the distortions from taxation are highest for corporate taxes and lowest for wage taxes. This efficiency ranking of different taxes does not hold in small open economies. It is shown that, in a small open economy, this ranking is reversed. Personal income taxes are less distortionary than wage taxes primarily because the link between domestic saving and investment is severed. Corporate taxes are also less distortionary for a variety of factors, such as changes in depreciation levels, payments to foreigners and terms of trade.