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

Publication Details

  • The Excess Burden of Taxation and Why it (Approximately) Quadruples When the Tax Rate Doubles
  • Published: Dec 2003
  • Status: Current
  • Author: Creedy, John
  • JEL Classification: D60; H21; H30
  • Hard copy: Available in PDF format only.
 

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

New Zealand Treasury Working Paper 03/29

Published Dec 2003

Author: John Creedy

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.

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