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Excess Burden of an Income Tax: What Do Mainstream Economists Really Measure?

Department of Economics and Social Sciences, Dalarna University, SE-781 88 Borlänge, Swedenrgr{at}du.se

Hans Lind

Department of Infrastructure, Division of Building and Real Estate Economics, Royal Institute of Technology, SE-100 44 Stockholm, Swedenhans.lind{at}infra.kth.se

An income tax can have side effects like decreased labor supply and lower effort levels. These side effects are important to consider in the decision of whether to introduce the tax. The terms deadweight lossand excess burdenare used by mainstream economists in this context. In this article, it is argued that according to the measures they use, an excess burden is registered, even if there are no actual side effects. The explanation is that they actually measure the difference between the situation with the income tax and a situation with a hypothetical lump sum tax. Because lump sum taxes are not realistic alternatives, for administrative and political reasons, the conventional measurements are irrelevant from a policy perspective.

Key Words: excess burden • deadweight loss • income taxes

Review of Radical Political Economics, Vol. 37, No. 4, 453-470 (2005)
DOI: 10.1177/0486613405280788


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