creates an excess burden. As with the case of excise taxes, the revenue
collected by the tax understates the total cost of the tax.
Excise taxes and income taxes impose costs in two ways. By taking resources from market
participants (consumers, firms, workers), they impose a direct burden. By reducing the volume
of specific market transactions, they also generate a deadweight loss—this is the excess burden
of the tax.Efficient and Equitable Taxation
An efficient tax is one that raises a given amount of revenue (the direct
burden) while minimizing the size of the excess burden. As can be
inferred from Figures 18-2 and 18-3 , the efficiency of either an excise
tax or an income tax is related to the relevant demand and supply
elasticities.
For example, as Figure 18-2 shows, the excess burden of an excise tax is
smaller when the demand for the product is less elastic. In the extreme
case of a perfectly inelastic demand, the excess burden of an excise tax is
zero; the tax raises revenue but leads to no reduction in consumption of
the specific product. Unfortunately, because the demand for many of life’s
necessities (such as food) is very inelastic, a tax system that was based
only on imposing excise taxes on goods with inelastic demands would
prove to be very regressive.
Many economists argue that taxing income is more efficient and more
equitable than imposing large numbers of excise taxes on products. The
greater efficiency of the income tax comes from the fact that the supply of