Reconciling alternative views about the appropriate social discount rate

This paper shows that, in an economy with an exogenous rate of return and a given capital income tax distortion, and with lump sum taxes as the marginal tax instrument, the SOC and MCF criteria both correctly identify all worthwhile projects if the criteria are properly applied. The equivalence between the SOC and MCF criteria continues to hold i) if distortionary taxes are used to balance the budget, and ii) if the rate of return to capital is endogenous. Apparent differences between the SOC and MCF criteria arise from different definitions of a project's indirect revenue effect. Neither criterion has an implementation advantage because the information requirements for each are identical.

► The SOC and MCF criteria both identify all worthy projects.
► The equivalence rests on different measures of a project's indirect revenue effect.
► The SOC criterion looks at the project's impact on government revenue holding welfare fixed.
► The MCF criterion looks at the project's impact on welfare holding the government budget balanced.
► The criteria require the same information so neither has an implementation advantage.