THE MARGINAL COST OF REDISTRIBUTION

The marginal cost of redistribution is the real economic cost to upper-income households per dollar of benefit to lower-income households; it exceeds 1 because of the efficiency costs of redistributive policies. This article examines the determinants of this marginal cost for linear income tar and negative income tax policies. It develops analytical expressions to calculate marginal cost that show how it depends on initial marginal tax rates, the degree of inequality, and labor supply elasticities. For plausible parameter values, marginal cost is estimated to be quite high; the article also offers an intuitive explanation for this result. The possibility of using different policies that redistribute income at lower cost is discussed.