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Reconsidering the Marginal Welfare Cost of Taxation

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  • JOHN FREEBAIRN

Abstract

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.

Suggested Citation

  • John Freebairn, 1995. "Reconsidering the Marginal Welfare Cost of Taxation," The Economic Record, The Economic Society of Australia, vol. 71(2), pages 121-131, June.
    • Handle: RePEc:bla:ecorec:v:71:y:1995:i:2:p:121-131
    DOI: 10.1111/j.1475-4932.1995.tb01879.x
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    References listed on IDEAS

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    2. Květa Kubátová, 2011. "The Comparative Analysis of Specific Effective Average Tax Rates of Corporation in the EU Countries in Years 1998 - 2007 [Komparativní analýza specifických efektivních průměrných sazeb daní korpora," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2011(4), pages 79-91.
    3. Peter Tisato, 1997. "User Economies of Scale: Bus Subsidy in Adelaide," The Economic Record, The Economic Society of Australia, vol. 73(223), pages 329-347, December.
    4. Špeciánová Jitka, 2018. "Unconditional Basic Income in the Czech Republic: What Type of Taxes Could Fund It? A Theoretical Tax Analysis," Basic Income Studies, De Gruyter, vol. 13(1), pages 1-19, June.
    5. Forsyth, Peter, 2002. "Privatisation and regulation of Australian and New Zealand airports," Journal of Air Transport Management, Elsevier, vol. 8(1), pages 19-28.
    6. Brodish, Paul Henry & Hakes, Jahn K., 2016. "Quantifying the individual-level association between income and mortality risk in the United States using the National Longitudinal Mortality Study," Social Science & Medicine, Elsevier, vol. 170(C), pages 180-187.

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