General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States

Abstract

In recent years, increasing attention has been paid by public finance economists to the marginal excess burden (MEB)1 per additional dollar of tax revenue. Estimates of MEBs stand in contrast to estimates of the welfare cost of taxes which are calculated by totally removing existing taxes and replacing them with equal yield lump sum taxes. Instead, an MEB estimate measures the incremental welfare costs of raising extra revenues from an already existing distorting tax. Earlier estimates of MEBs have either concentrated on particular portions of the tax system, or have employed partial equilibrium methods. Here, we examine the MEB of all major taxes in the United States, using a multisector, dynamic computational general equilibrium model. This allows us to calculate simultaneously the marginal welfare effects of individual income taxes, corporate taxes, payroll taxes, sales and excise taxes, and other smaller sources of revenue. We find that the marginal excess burden