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Working paper

The Excess Burden of Taxation and Why it (Approximately) Quadruples When the Tax Rate Doubles (WP 03/29)

Issue date: 
Monday, 1 December 2003
Status: 
Current
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Publication category: 
JEL classification: 
D60 - Welfare Economics: General
H21 - Taxation and Subsidies: Efficiency; Optimal Taxation
H30 - Fiscal Policies and Behavior of Economic Agents: General

Formats and related files

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 this burden depends on the square of the tax rate.

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 an unchanged 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 this burden depends on the square of the tax rate.

Last updated: 
Wednesday, 24 October 2007