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The Marginal Cost of Public FundsTheory and Applications$
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Bev Dahlby

Print publication date: 2008

Print ISBN-13: 9780262042505

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262042505.001.0001

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Applications of the MCF in Federations

Applications of the MCF in Federations

(p.275) 10 Applications of the MCF in Federations
The Marginal Cost of Public Funds

Bev Dahlby

The MIT Press

This chapter uses the marginal cost of public funds (MCF) to analyze three policy issues that arise in a federation. The chapter is organized as follows. Section 10.1 uses the MCF concept to analyze the provision of investment incentives by subnational governments. In particular, this framework is used to evaluate the provision of R&D tax subsidies by provincial governments in Canada. Section 10.2 shows how fiscal equalization grants may have affected the perceived MCFs of the state governments in Australia. Section 10.3 applies a modified version of the Kanbur and Keen (1993) crossborder shopping model to the effects of an equalization grant system on the horizontal and vertical fiscal imbalances in a federation. It explores how the financing of equalization grants—either funding by the federal government out of general tax revenues or direct contributions by the state governments—affects the ability of equalization grants to address vertical and horizontal fiscal imbalances.

Keywords:   marginal cost of public funds, taxation, tax policy, federation, tax incentives, fiscal imbalance, fiscal equalization grants

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