The Marginal Cost of Public Funds in Morocco: An Estimation Using a Computable General Equilibrium Model
Using a Computable General Equilibrium model, this study estimates Morocco's Marginal Cost of Public Funds to find that direct taxes are the most efficient fiscal instrument—especially when paired with lump-sum transfers that lower costs below unity—while import and consumption taxes remain economically costly regardless of revenue usage.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Every government needs money to build roads, fund schools, and keep hospitals running. To get this money, the state collects taxes from people and businesses. But taking money out of the economy is not a neutral act; it changes how people behave. When a tax is added, it can make work less attractive, make saving less appealing, or make certain goods too expensive to buy. These changes create a hidden cost, a kind of friction that slows down the economy and reduces the overall well-being of society. Economists call this the "marginal cost of public funds." It is a measure of how much extra pain the economy feels for every single unit of currency the government collects. If the cost is high, it means the tax is causing a lot of unnecessary damage. If the cost is low, the tax is relatively efficient. Understanding this cost is vital for any country trying to grow its economy without crushing its citizens, yet measuring it requires peering into the complex web of how money, labor, and goods interact across an entire nation.
In a recent study, researchers set out to map this hidden cost specifically for Morocco. They wanted to know which taxes hurt the economy the most and which ones are the least damaging. To do this, they built a detailed digital model of the Moroccan economy, a virtual simulation that mimics how real people and companies react when prices change. This model, known as a Computable General Equilibrium model, allowed them to test what would happen if the government raised different types of taxes by a tiny amount. They looked at five specific scenarios: increasing taxes on income and corporate profits, raising taxes on industrial production, increasing duties on imported goods, boosting taxes on everyday consumption, and finally, raising all of them at once. For each scenario, they ran two different simulations. In the first, they assumed the extra money collected would simply be saved by the government. In the second, they assumed the government would take that same extra money and hand it directly back to the people as a lump-sum payment. This second step was crucial, because it tested whether giving the money back to households could cancel out the pain caused by the tax in the first place.
The results revealed a stark difference between the types of taxes. When the extra money was kept by the government, the most efficient tax was the one on direct income and corporate profits. For every additional dirham collected this way, the total cost to the economy was 1.44 dirhams. This means that for every unit of revenue, society lost an extra 0.44 units in welfare due to the distortions the tax created. In contrast, taxes on imported goods were by far the most expensive. For every dirham collected from import duties, the economy suffered a cost of 3.16 dirhams. This high cost happens because people often cannot easily stop buying essential imported goods even when they become more expensive, so the tax acts as a heavy burden without generating much change in behavior, leading to a large loss in well-being. Taxes on production and consumption fell somewhere in the middle, with costs of 1.97 and 1.805 dirhams respectively.
However, the story changed dramatically when the researchers assumed the government returned the money to the people. When the extra tax revenue was given back to households as a direct transfer, the cost of collecting that money dropped significantly for almost every tax. The direct income tax became so efficient that its cost fell to 0.62 dirhams per dirham collected. This is a remarkable finding because it means that if the government taxes income and then immediately gives that money back to the people, the system actually costs society less than a perfectly neutral tax would. The production tax also dropped to a level of 0.99, just barely below the threshold where it starts to hurt the economy. Even the expensive import tax saw its cost fall, dropping from 3.16 to 2.31, though it remained the most costly option. The consumption tax also became cheaper, falling to 1.15, but it stayed above the point where it would be considered free of economic damage.
The researchers also tested how solid these findings were by changing the assumptions in their model. They asked what would happen if people were more or less willing to switch between domestic and foreign goods, or if capital could not move freely between industries. They found that the ranking of the taxes remained largely the same: direct taxes were still the cheapest, and import taxes were still the most expensive, regardless of these changes. There was one important exception: if the country allowed its currency value to float freely rather than keeping it fixed, the cost of import taxes dropped so much that they became cheaper than consumption taxes. This suggests that the high cost of import taxes is partly a result of how the country manages its currency. The study also confirmed that the way the government uses the money is the single most important factor. The decision to save the money versus giving it back to people had a bigger impact on the results than almost any other assumption in the model.
Ultimately, the study offers a clear path forward for Morocco's tax policy. It suggests that the country should prioritize taxes on income and profits, especially if those taxes are paired with a plan to return the revenue to households. This combination not only raises money but does so with the least amount of economic pain. The study warns against relying too heavily on taxes on imports, which are currently very costly, and advises caution with taxes on consumption, which remain expensive even when the money is returned. The key takeaway is that a tax reform cannot be judged by the tax rate alone; it must be judged by what the government does with the money afterward. By treating the use of tax revenue as a central part of the design, rather than an afterthought, policymakers can turn a potentially damaging tax into a tool that actually improves the well-being of the nation.
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