The Distribution of Estimates of the Marginal Costs of Taxation

This paper shows how the sampling distribution of estimates of deadweight costs from taxation can be simulated and used to construct confidence intervals. The method is applied to the models and data developed by Diewert and Lawrence (1994, 1996) to study the marginal costs of taxation in New Zealand but the methods proposed have more general relevance. The application shows that the data are unable to support any firm conclusions about the deadweight costs of three of the six forms of taxation considered by Diewert and Lawrence. In addition, the inclusion of a linear spline function on the consumers’ expenditure function of the original model is shown to increase the point estimate of the marginal excess burden from labour taxation by 80 percent. *This research was funded by the Taxation Economics Group of the New Zealand Inland Revenue Department. The project was assisted immeasurably by Erwin Diewert who kindly provided the computer code used in the production model and in the general equilibrium sections of the original paper. Additional helpful comments were provided by Patrick Caragata and David Giles.