Discussion Papers,
Statistics Norway, Research Department

Abstract: The marginal cost of public funds (MCF) is substantial in generous welfare state countries according to Kleven and Kreiner (2006). Their main estimate for the Danish economy exceeds 2 mainly because taxation distorts labor force participation. Adjustments in social transfers which alleviate such extensive margin distortions are however not considered. This study shows that MCF within a similar welfare state country, Norway, should be in the interval 1.06 - 1.16 when social transfers alleviate such distortions.

Keywords: Marginal cost of public funds; Optimal income taxation; Social security transfers; tagging

JEL-codes: H21; H23; H41

26 pages, June 2018

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