We found a match
Your institution may have rights to this item. Sign in to continue.
- Title
Excess Burden: The Corner Case vs. Ballentine and McLure.
- Authors
Head, John G.; Shoup, Carl S.
- Abstract
One of the most important and best known propositions in the traditional analysis of excise taxes is that the excess burden of an excise varies directly with the degree of substitutability in consumption between the taxed good and other goods. This conclusion seems, however, to conflict with the intuition, common among students, that, even abstracting from revenue differences, the consumer should suffer less of a burden in switching his consumption from the taxed good the better the substitutes that are available. This intuition may have some limited validity in cases of corner solutions which have been somewhat neglected in the excess burden literature. Following economist Arnold Harberger's well-known diagrammatic analysis, and assuming linear demand schedules and constant costs, it was showed that, for a given tax per unit, as substitutability increases from zero and the slope of the income-compensated demand schedule steadily diminishes, excess burden increases from zero to a maximum which is reached where the tax is just sufficient to choke off completely consumption of the taxed product. Beyond this point further increases in substitutability produce corner solutions and excess burden steadily diminishes, ultimately to zero where perfect substitutes are available. The general proposition that excess burden varies directly with substitutability in consumption therefore requires qualification when account is taken of these "corner cases."
- Subjects
EXCISE tax; CONSUMPTION (Economics); TAX incidence; TAXATION of articles of consumption; HARBERGER, Arnold; CONSUMER behavior; ECONOMIC demand
- Publication
American Economic Review, 1978, Vol 68, Issue 1, p235
- ISSN
0002-8282
- Publication type
Article