Figure 18-3 Direct and Excess Burdens of an Income Tax
supply any given amount of labour services only if the pre-tax wage is
increased to offset the effect of the tax.
An income tax generates both a direct and an excess burden. Without
an income tax, the labour-market equilibrium has employment of
a wage of. An income tax shifts the supply of labour curve upward;
workers need a higher pre-tax wage in order to supply the same amount
of labour. The result is an increase in the pre-tax wage to and a
reduction in the level of employment to. The tax revenue generated is
the dark shaded area; this is the direct burden of the income tax. The tax
also generates a deadweight loss, as shown by the light shaded area; this
is the excess burden of the income tax.
The income tax generates both a direct burden and an excess burden. The
tax raises revenue by collecting some percentage of workers’ wages. This
is a cost borne by both workers and firms. By reducing the equilibrium
level of employment and creating a deadweight loss, the income tax also
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