Monday, October 18, 2010

CATO on excess burden

CATO makes the (easy) case for doing cost-benefit analysis correctly by taking account of the "excess burden" also known as the marginal social cost of public funds. A dollar of public funds costs society more than a dollar of output both because of the direct costs of running the tax system - IRS agents are not free - and because our tax system reduces the size of the pie by distorting individual choices away from their unconstrained optima. For example, income taxes distort individual choices between work and leisure.

There is nothing really political here, it is just that doing cost-benefit analyses incorrectly furthers the agendas of those who want the government to spend more on activities that do not pass cost-benefit tests.

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