The Excess Burden of Taxation and Why it (Approximately) Quadruples When the Tax Rate Doubles

John Creedy

No 03/29, Treasury Working Paper Series from New Zealand Treasury

Abstract: The 'excess burden' of taxation represents an efficiency loss which must be compared with any perceived gains arising either from income redistribution or the non-transfer expenditure carried out by the government. An important property is that, under certain assumptions, it increases disproportionately with the tax rate. This result provides the basis of a general presumption in favour of a broad-based and low tax rate system: any exemptions which reduce the tax base inevitably raise the tax rate required to obtain anunchanged amount of total tax revenue. The aims of this paper are to provide a nontechnical explanation of the concepts of welfare change and excess burden used in the public finance literature, and to demonstrate the result that an approximation to thisburden depends on the square of the tax rate.

Keywords: Taxation; excess burden; equivalent variation; compensating variation (search for similar items in EconPapers)
JEL-codes: D60 H21 H30 (search for similar items in EconPapers)
Pages: 26
Date: 2003-12
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://treasury.govt.nz/sites/default/files/2007-10/twp03-29.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nzt:nztwps:03/29

Access Statistics for this paper

More papers in Treasury Working Paper Series from New Zealand Treasury New Zealand Treasury, PO Box 3724, Wellington 6140, New Zealand. Contact information at EDIRC.
Bibliographic data for series maintained by CSS I&T Web & Publishing, The Treasury ().