THE COST OF PUBLIC FUNDS IN AUSTRALIA

A model of labour supply is used to calculate Australia's marginal cos t of public funds, which is the appropriate cut-off benefit/cost ratio for an additional public project. The labour supply model incorporate s effective average and marginal tax rates faced by the representative household in each gross income decile, These rates are estimated from the ABS 1988-89 Household Expenditure Survey. A simulation analysis i s performed to calculate the effect on labour supply of a I per cent i ncrease in marginal tax rates. The estimated changes in tax revenues a nd deadweight loss in each decile are used to estimate the marginal co st of public funds.