Redistribution and the marginal cost of public funds

Discussions of the marginal cost of public funds with distortionary taxatio n are often cast in the framework of a one-consumer economy, while the main justification of distortionary taxes is that they are needed for redistrib ution. This paper analyzes the issue in a model with heterogeneous consumer s and a linear income tax, focusing on the tradeoff between labour market d istortions and the redistribution from high-wage to low-wage workers. In an optimal tax system the MCF will be the same for all sources of funds and u nder certain assumptions less than. one. Without optimality the MCF will in general differ between different sources of finance. (C) 1998 Elsevier Sci ence S.A. All rights reserved.