Use and Abuse of the Concept of ‘Excess Burden’ in the Theory of Public Finance

Cristian F. Sepúlveda ()
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Cristian F. Sepúlveda: Farmingdale State College (SUNY9

Hacienda Pública Española / Review of Public Economics, 2024, vol. 248, issue 1, 143-166

Abstract: Optimal tax theory assigns two roles to the measure of excess burden, one to compare the costs of alternative tax instruments, the other to measure the deadweight loss of specific tax instruments, which presumably correspond to the welfare costs of their distortionary effects. This paper claims that the deadweight loss provides misleading measures of welfare costs from tax distortions, because it requires to make unverified assumptions to equate costs to distortions and ensure that the deadweight loss is greater than zero. Taxes other than the lump-sum tax and tax-induced changes in relative prices cannot generally be assumed to be distortionary.

Keywords: Excess burden; Deadweight loss; Optimal taxation; Tax distortions; Lump-sum tax (search for similar items in EconPapers)
JEL-codes: H21 H24 J22 (search for similar items in EconPapers)
Date: 2024
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