Cost-Benefit Analysis of the Marginal Revenue from Indirect Taxes

Amir Bakir


The paper summarizes the literature on the marginal cost of tax revenues and develops a formula for its measurement in terms of estimable demand parameters. The paper dwells on the paper by Diamond and Mirrlees (1971), inter alia, where the demand interaction between public goods and the taxed goods is taken into consideration. The interaction term is substituted out using Euler’s theorem and the Slutsky equation under the assumption that demand functions are homogeneous of degree zero. The paper illustrates the cost-benefit calculation of marginal tax revenues from indirect taxes using actual data from British studies and compares this with results obtained by other authors in their similar studies. The paper concludes that the Benefit-Cost ratio of marginal tax revenues might exceed one and analysts should be cautioned against any assumptions regarding this ratio of being less than one. The paper, also, highlights some areas for further research to be carried out along the same lines of analysis.


Marginal Cost, Indirect Taxes, Public Good.

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