Political Economy and the Social Marginal Cost of Public Funds: The Case of the Meltzer-Richard Economy

Abstract

In previous studies on the social marginal cost of public funds (SMCF), the existing tax system has been assumed to be either arbitrary or optimal. This note explores another possibility: the existing tax system itself represents a political equilibrium. Our exploration proceeds in Meltzer and Richards (1981) political economy of redistributive taxation. An interesting feature of our finding is that the degree of income inequality as measured by the ratio of mean to median income can play an important role in estimating the SMCF and judging whether the level of redistribution is excessive or inadequate.