No Such Thing as a Free Lunch: Principles of Economics (Part 91)

“There will always be a part, and always a very large part of every community, that have no care but for themselves, and whose care for themselves reaches little further than impatience of immediate pain, and eagerness for the nearest good.”

― Samuel Johnson, Taxation No Tyranny

Public Finance: The Economics of Taxation

(Part F)

by

Charles Lamson

Measuring Excess Burdens

Recall from last post that the amount by which the burden of a tax exceeds the revenue collected by the government is called the excess burden of the tax. The total burden of a tax is the sum of the revenue collected from the tax and the excess burden created by the tax. Because excess burdens are a form of waste, or lost value, tax policy should be written to minimize them. (Excess burdens are also called deadweight losses.)

To measure the total burden of the tax we need to recall the notion of consumer surplus from part 19 of this analysis.

The excess burden that would result from the tax under the two assumptions about demand elasticity are approximately equal to the areas of the shaded triangles in Figure 8. As you can see, where demand is more responsive (more elastic), the excess burden is larger.

If demands were perfectly inelastic no distortion what occur, and there would be no excess burden. The tax would simply transfer part of the surplus being earned by consumers to the government. That is why some economists favor uniform land taxes over other taxes. Because land is in perfectly inelastic supply, a uniform tax on all land uses distorts economic decisions less than taxes levied on other factors of production that are in variable supply. 

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 369-371*

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