Signature
C_adj = (1 + lambda) * G
| Inputs | Definition | Unit |
|---|---|---|
lambda | Deadweight loss of raising one more unit of revenue, such as 0.25 (OMB) or 0.2 (Norway) | currency per unit of revenue |
G | Option's net call on tax-financed public budgets, after any savings and user charges | currency |
C_adj | Net public cost after adding the deadweight loss of raising it through taxes | currency |
|---|
Function
Deadweight loss of a wedge between marginal value and marginal cost
Maps a price distortion, such as a tax, a subsidy, a price above cost or insurance that lowers the price at the point of use, to the net surplus it destroys: the value of trades it prevents in excess of their cost, or the cost of trades it adds in excess of their value. Money that only changes hands, such as tax revenue or an insurer's payments, is netted out. With straight-line curves the area is a triangle whose height is the wedge and whose base is the change in quantity. The notation follows the Deadweight Loss article.
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Implementations
Excel
Social cost of public funding from named cells
With the marginal excess burden in ExcessBurden and the net public cost in NetPublicCost, the formula returns the adjusted cost, held in AdjustedCost.
=(1+ExcessBurden)*NetPublicCost
Assumptions
Excess burden applied only to tax-financed net spending
G is the net effect on public budgets financed by taxes. OMB states that investments funded by user charges that work like market prices carry no excess burden, and DFØ bases the cost on the net financing need.
One marginal excess burden for all tax-financed costs
The same lambda applies to every tax-financed cost in the comparison, as a national figure set in guidance. OMB allows a different figure where specific information supports one.
Worked examples
OMB supplementary analysis with a 25 per cent excess burden
Public expenditure of 1 million US dollars is multiplied by 1.25 in the OMB supplementary analysis, giving a social cost of 1.25 million.
lambda = 0.25; G = 1000000; C_adj = 1250000
Norwegian tax financing cost on a measure of 10 million kroner
A measure with net public financing of 10 million kroner carries a tax financing cost of 2 million, a total of 12 million kroner.
lambda = 0.2; G = 10000000; C_adj = 12000000
Green Book default of no excess burden
Under the UK Green Book default the costs of raising public funds are not included, which is lambda of 0: a net public cost of 500,000 pounds stays 500,000.
lambda = 0; G = 500000; C_adj = 500000
Common errors
Comparing an adjusted cost per QALY with an unadjusted threshold
Scaling costs by 1.25 raises every incremental cost per QALY by 25 per cent. Setting the adjusted ratio against a threshold expressed in unadjusted money changes decisions even when the ranking does not change.
Applying the excess burden where guidance excludes it
OMB does not require the supplementary analysis for cost-effectiveness analyses and gives user-charge funding no excess burden; the Green Book tells practitioners not generally to include the costs of raising public funds. The Norwegian figure already covers administrative costs of tax collection, so adding them again double counts.
Sources
OMB 25 per cent excess burden and the 1.25 factor
Office of Management and Budget. Circular No. A-94: Guidelines and discount rates for benefit-cost analysis of federal programs. Washington, DC: OMB; 29 October 1992, reinstated by Memorandum M-25-23 in April 2025. Section 11: a reasonable estimate of the marginal excess burden is 25 cents per dollar of revenue; public expenditures are multiplied by 1.25 in a supplementary analysis of public investments not justified on cost-saving grounds; not required for cost-effectiveness analyses; a different figure may be used where specific information supports it.
Norwegian tax financing cost set in circular R-109/2021
Direktoratet for forvaltning og økonomistyring (DFØ). Veileder i samfunnsøkonomiske analyser. Oslo: DFØ; 2023. Section 3.4.8, reproducing Finansdepartementet circular R-109/2021: a tax financing cost of 20 øre per krone of net public financing, used in all sectors, covering the efficiency loss from taxation and the administrative costs of tax collection, and applied also within an allocated budget.
Green Book on the costs of raising public funds
HM Treasury. The Green Book (2026). London: HM Treasury; 2026. Chapter 6, Costs of raising public funds: taxes create distortions, but practitioners should not generally include these costs in appraisal because most proposals are funded from pre-determined departmental budgets.
Canonical Identity
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