Lecture Note 15: Social Cost Benefit Analysis - University of ...

marginal value of income is the same for everyone. The second, which we did not
stress in calculations because we assumed a utilitarian social welfare function
from the beginning, is that all individuals must have the same weight in social
welfare function (which is true for the utilitarian social welfare function).
Both of these assumptions seriously undermine the case for redistribution in
general. If all individuals have the same private marginal value of income, then
were the case, then the main reason for any government to get involved with
distribution is void (remember that one key reason a social planner would want
to distributive income is precisely that the marginal value of income is di¤erent
for di¤erent people). If on top of that the social welfare function puts equal
weight on everyone, then there is not case for distribution left. If is as if the
government thinks that everyone is the same. This makes it clear, on the one
hand, that the marginal cost of public funds approach is really about e¢ ciency:
it provides a systematic way to integrate into the SCBA the fact that public
funds must be raised through distortionary taxation and in situations where
the control area of the analyst is such that the broader tax system must simply
be taken as given, it makes sense to adjust the …scal implications of a project
or programme for the e¢ ciency cost of raising the extra revenue with the preexisting
tax instruments (or if the project generates public revenue to take into
account that this will then reduce the pressure on other sources of revenue). On
the other hand, the two assumption required to make the approach theoretically
valid clearly make it hard to justify the approach as a way to take distribution
into account. At the surface is may seem intuitive that projects that distribute
from the general taxpayer who must pay higher taxes as a consequence of a
project to the groups of individuals that bene…ts from the project (who typically
constitute a small subset of all taxpayers). But if we think (assume) that the
marginal value of income is the same for everyone, then we should not be very
concerned with distribution in the …rst place and we could as well raise the
required funds using a poll tax. This would avoid any distortions but then
there is no need to make any adjustment in the …rst place.
In practice, however, it is clear that poll taxes are not being levied on a
large scale (and the experience in the UK in the 1980s suggests that they may
not be entirely non-distortionary if we count the social cost of the tax rebellion
that was triggered). Accordingly, many cost-bene…t analysts take the view that
adjusting the e¤ects on the governments budget of projects for the marginal
cost of public funds is a sensible way to proceed in particular when the analyst
is not able to re-design the entire tax system and thus must take whatever taxes
are levied as given. So, if we take that line, we are only left with one question:
which value should be using for the adjustment. Boardman suggests that the
Marginal Excess Tax Burden per unit of revenue raised is between 0:33 and 0:46
for all taxes taking together, from 0:11 to 0:39 for the sales tax and from 0:31 to
0:65 for the income tax. These estimates apply to the USA; for other countries,
see Klever and Kreiner (2006). They estimate that the marginal cost of public
funds for the UK is about 1:26.
Exercise 6 Can the fact that the marginal excess tax burden di¤ers by tax base
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