Marginal Cost of Public Funds: From the Theory to the Empirical Application for the Evaluation of the Efficiency of the Tax-Benefit Systems

Abstract

Abstract We estimate the marginal cost of public funds (MCF) as an overall indicator of the efficiency of tax-benefit systems and their reforms. The novelty of our work is the calculation of a MCF indicator fully based on empirical micro-data representative of the Italian population. This indicator combines the incentives embodied in the tax-benefit system at the intensive and extensive margins with the respective elasticities of labour supply at both margins. Our results first show the importance of taking into account the heterogeneity of the population with women (both single and in couples) facing a more inefficient system than men. Second, our micro-data based indicator shows the potential bias of MCF indicators based on stylized and hypothetical measures of work incentives.