Excess burden of taxation
This article includes a list of general references, but it lacks sufficient corresponding inline citations. (April 2009) |
Part of a series on |
Taxation |
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An aspect of fiscal policy |
In
An equivalent kind of inefficiency can also be caused by subsidies (which technically can be viewed as taxes with negative rates).[citation needed]
Economic losses due to taxes have been evaluated to be as low as 2.5 cents per dollar of revenue, and as high as 30 cents per dollar of revenue (on average), and even much higher at the margins.[2][3][4]
Measures of the excess burden
The cost of a distortion is usually measured as the amount that would have to be paid to the people affected by its supply, the greater the excess burden. The second is the tax rate: as a general rule, the excess burden of a tax increases with the square of the tax rate.[citation needed]
The average cost of funds is the total cost of distortions divided by the total revenue collected by a government. In contrast, the marginal cost of funds (MCF) is the size of the distortion that accompanied the last unit of revenue raised (i.e. the rate of change of distortion with respect to revenue). In most cases, the MCF increases as the amount of tax collected increases.[citation needed]
A common position in economics is that the costs in a
Distortion and redistribution
In the case of
In fact almost any tax measure will distort the economy from the path or process that would have prevailed in its absence. For example, a sales tax applied to all goods will tend to discourage consumption of all the taxed items, and an income tax will tend to discourage people from earning money in the category of income that is taxed (unless they can manage to avoid being taxed). Some people may move out of the work force (to avoid income tax); some may move into the cash or black economies (where incomes are not revealed to the tax authorities).[citation needed]
For example, in Western nations the incomes of the relatively affluent are taxed partly to provide the money used to assist the relatively poor. As a result of the taxes (and associated subsidies to the poor), incentives are changed for both groups. The relatively rich are discouraged from declaring income and from earning marginal (extra) income, because they know that any additional money that they earn and declare will be taxed at their highest marginal tax rates.[citation needed] At the same time the poor have an incentive to conceal their own taxable income (and usually their assets) so as to increase the likelihood of their receiving state assistance (welfare trap).
There was an example of distortion of the economy by tax policy some years ago in the UK when cars supplied by employers to their employees were taxed at advantageous rates (e.g. encouraging the growth of company car fleets). Over several years the distortion grew to the point that the majority of cars used by working families were company cars and the dealership structures, and even the types of cars used, altered to adjust to the tax regime.[citation needed]
Deliberate distortion
Here, the fiscal distortion is deliberate, so as to compensate for externalities. "
See also
- Effect of taxes and subsidies on price
- Laffer curve
- Land value tax
- Lump-sum tax
- Optimal tax
- Tax incidence
References
- ^ "Adam Smith and Tax Burden Theory". Retrieved 6 Jun 2012.
- S2CID 57568398.
- S2CID 152604988.
- doi:10.3386/w2132.
- ^ Ostry Jonathan, Berg Andrew, Tsangarides Charalambos. “Redistribution, Inequality, and Growth”. Staff Discussion Notes No. 14/02, International Monetary Fund, February 2014
- Bayer, R. C., & Sutter, M. (2009). The excess burden of tax evasion—An experimental detection–concealment contest. European Economic Review,53(5), 527-543.
- The New Palgrave: A Dictionary of Economics, v. 1, pp. 865–67.
- N.H. Stern (1987). "optimal taxation," The New Palgrave: A Dictionary of Economics, v. 1, pp. 865–67.