Cost-Benefit Analysis and The Distributional Consequences of Government Projects

This paper points out the similarities and differences between cost-benefit analysis and tax reform. By restricting the analysis to the margin it is shown that both areas can be handled by the same method. In both areas, there is a need to define social distributional weights and to evaluate the Marginal Efficiency Cost of Public Funds (MECF). It is suggested that the social distributional weights be derived from popular inequality indices. Such derivation enables the decomposition of the impact of the project (tax reform) on growth and redistribution so that one can evaluate the trade-off between the two.