18.2 Evaluating the Tax System LO 2, 3
Evaluating the tax system involves evaluating the efficiency and
progressivity of the entire system, rather than of individual taxes
within the system.
The total Canadian tax structure is roughly proportional, except for
very low-income and very high-income groups (where it is mildly
progressive).
Taxes often generate allocative inefficiency. The allocative
inefficiency of a tax is measured by the excess burden. Because of the
excess burden, a tax is more costly than just the amount paid by the
taxpayers (the direct burden).
There are potentially important disincentive effects of taxation, as
represented by a Laffer curve. After some point, increases in the tax
rate reduce the incentive to produce taxable income, and thus reduce
tax revenue.