A generalized approach to multigeneration project evaluation

In this article, we generalize the existing descriptive approach to multigeneration public project evaluation, taking into account distortionary taxes on capital income. In contrast to conventional wisdom, we show that such generalization does not require a project-specific social discount rate (SDR) expressed as a weighted average of gross and net rates of return. What emerges is the concept of the marginal cost of public funds (MCF) that has the convenient property of project independence. In addition, the MCF-based criterion identifies projects that, along with appropriate intergenerational transfers through time-varying head taxes, are Pareto improving, and is, therefore, independent of any utilitarian social welfare function being used.