TY - JOUR
T1 - The marginal cost of public funds
T2 - hours of work versus labor force participation
AU - Kleven, Henrik Jacobsen
AU - Kreiner, Claus Thustrup
N1 - JEL Classification: H21, H41, J20
PY - 2006
Y1 - 2006
N2 - This paper extends the theory and measurement of the marginal cost of public funds (MCF) to account for labor force participation responses. Our work is motivated by the emerging consensus in the empirical literature that extensive (participation) responses are more important than intensive (hours of work) responses. In the modelling of extensive responses, we argue that it is crucial to account for the presence of non-convexities created by fixed work costs. In a non-convex framework, tax and transfer reforms give rise to discrete participation responses generating first-order effects on government revenue. These revenue effects make the marginal cost of funds higher and we show numerically that the implications for MCF tend to be substantial
AB - This paper extends the theory and measurement of the marginal cost of public funds (MCF) to account for labor force participation responses. Our work is motivated by the emerging consensus in the empirical literature that extensive (participation) responses are more important than intensive (hours of work) responses. In the modelling of extensive responses, we argue that it is crucial to account for the presence of non-convexities created by fixed work costs. In a non-convex framework, tax and transfer reforms give rise to discrete participation responses generating first-order effects on government revenue. These revenue effects make the marginal cost of funds higher and we show numerically that the implications for MCF tend to be substantial
KW - Faculty of Social Sciences
KW - taxation
KW - labor supply
U2 - 10.1016/j.jpubeco.2006.03.006
DO - 10.1016/j.jpubeco.2006.03.006
M3 - Journal article
SN - 0047-2727
VL - 90
SP - 1955
EP - 1973
JO - Journal of Public Economics
JF - Journal of Public Economics
IS - 10-11
ER -