MARGINAL WELFARE COST CALCULATIONS - DIFFERENTIAL ANALYSIS VS BALANCED-BUDGET ANALYSIS

In a differential analysis, tax revenue collections are held constant. In a balanced-budget analysis, the spending level is changed, and the level of distortionary taxation is changed correspondingly. Here, income effects are important, and efficiency calculations depend chiefly on uncompensated elasticities, unless government exhaustive expenditure is assumed to substitute closely for cash. A small-scale computational general equilibrium model is constructed, and differential and balanced-budget experiments are performed. Results show that marginal welfare costs, calculated from balanced-budget experiments, can be negative when labor supply functions are backward-bending. Interactions among parameter values and efficiency costs are explored. © 1990.