Bridging the Tax-Expenditure Gap: Green Taxes and the Marginal Cost of Funds
CESifo, Munich, 2001
CESifo Working Paper No. 579
![](https://cesifo.org/DocImg/cesifo_wp579.jpg?c=1689236961)
The marginal cost of public funds is usually seen as a number greater than one, reflecting the efficiency cost of distortionary taxes. But economic intuition suggests that since green taxes are efficiency-enhancing the MCF with such taxes will be less than one. The paper demonstrates that this intuition is not necessarily true, even when a green tax is the sole source of funds. The analysis also considers the MCF with a proportional income tax, given the presence of green taxes. It compares the optimization approach to the MCF with that of a balanced budget reform and shows that they lead to equivalent results.