Operational expressions for the marginal cost of indirect taxation when merit arguments matter

Abstract

Marginal indirect tax reform analysis evaluates for each commodity (group) the marginal welfare cost (MC) of increasing government revenue by one Euro by raising the indirect tax rate on that commodity. In this paper, I propose an adjustment to the MC expressions to allow for (de)merit good arguments and show how this adjustment can easily be parameterized on the basis of econometric demand analysis.