A conclusion of applied welfare economics is that marginal redistributions of income are inefficient [Browning and Johnson (1984), Ballard (1988)]. Yet, most of this literature ignores the fact that households can make tax-deductible gifts to private charity that alter the welfare cost of a...

We present analytic formulas for calculating marginal welfare costs when taxes are levied against the wages of a heterogeneous population of households and marginal tax revenue finances either the supply of a public good or lump-sum transfers. The formulas are applied to explain the wide...