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A Note on the Concept of Excess Burden

Author

Listed:
  • Hans Lind

    (ivision of Building and Real Estate Economics, Royal Institute of Technology, SE-100 44 Stockholm, Sweden)

  • Roland Granqvist

    (School of Business, Dalarna University, SE-781 88 Borlänge, Sweden)

Abstract

It is argued that there has been a shift in the meaning of "excess burden" from Pigou to modern economics, related to what is used as a reference point when the effect of a tax is discussed. Is it the situation before the tax was introduced or what would have happened if a lump sum tax had been used instead? This distinction is important for tax policy, since the latter reference point leads to a larger, sometimes much larger, numerical value for the excess burden. However, the distinction is not often clearly made and this has led to risks for misguided political decisions on taxes. It is further argued that when excess burden and efficiency losses are discussed, economists have neglected to discuss the meaning of “can”, or “possible”, when the Pareto principle is formulated. Is it reasonable to say that welfare "can" be improved by a lump sum tax instead of a "distortionary" tax if, as most economists seem to believe, such a tax is not a realistic alternative? Since conceptual clearness about the excess burden of taxes is important, some suggestions for improving the situation are also presented.

Suggested Citation

  • Hans Lind & Roland Granqvist, 2010. "A Note on the Concept of Excess Burden," Economic Analysis and Policy, Elsevier, vol. 40(1), pages 78-88, March.
    • Handle: RePEc:eee:ecanpo:v40:y:2010:i:1:p:78-88
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    Citations

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    Cited by:

    1. Cristian F. Sepúlveda, 2024. "Use and Abuse of the Concept of ‘Excess Burden’ in the Theory of Public Finance," Hacienda Pública Española / Review of Public Economics, IEF, vol. 248(1), pages 143-166, March.
    2. Stephan Unger, 2019. "The Effect of Allocative Efficiency of Free Markets on Entropy and its Implications on Taxes," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 5(4), pages 287-300, October.
    3. Magazzino, Cosimo & Forte, Francesco, 2010. "Optimal size of government and economic growth in EU-27," MPRA Paper 26669, University Library of Munich, Germany.
    4. Wittmann, Nadine, 2013. "OPEC: How to transition from black to green gold," Energy Policy, Elsevier, vol. 62(C), pages 959-965.

    More about this item

    Keywords

    Excess burden; Pigou; distortion; lump-sum tax;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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