Should Governments Apply a Correction for the Cost of Taxation in Social Cost Benefit Analysis?

Distortionary costs of taxation refer to things like individuals’ reluctance to work or invest more as a result of governments raising taxes. In this video, Bas Jacobs (Sijbren Cnossen Professor of Public Economics at Erasmus School of Economics) considers whether governments should apply a correction for such costs of taxation in social benefit cost analyses. Applying the optimal taxation model, Jacobs notes that the distributional benefits of public investment in projects like bridges or swimming pools are often neglected by economists. Jacobs argues that there is no need to correct social cost benefits for the distortions of taxation because they are compensated by distributional benefits. Concluding that more public projects would be likely to be approved under this reasoning, Jacobs also makes a persuasive case for its relevance to other branches of public economics.

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