On the Marginal Welfare Cost of Taxation

TLDR

The study aims to develop a rigorous partial‑equilibrium analysis of the determinants of marginal welfare cost (MWC) of labor‑earning taxes. The authors employ a partial‑equilibrium framework to model how tax parameters influence MWC. The analysis shows that MWC can range from under 10 % to over 300 % of marginal tax revenue, with intermediate estimates around 25–50 %, though extreme values remain plausible.

Abstract

This paper develops a rigorous partial equilibrium analysis of the determinants of margin al welfare cost (MWC) of taxes on labor earnings. It shows that four key parameters interact to determine the magnitude of MWC. Using aggregate data and plausible ranges of values for the parameters, MWC can vary from under 10 percent to more than 300 percent of marginal tax revenue. Intermediate parameter values sugge st MWC is in the 25-50 percent range. However, the more extreme estimates cannot be ruled out on the basis of available evidence, suggesting that MWC cannot yet be Copyright 1987 by American Economic Association.