Burden of Taxation

There are two kinds: the direct cost to taxpayers (though this is not a cost to society as a whole since what taxpayers lose others gain) and the 'excess burden' or 'deadweight loss'. The excess burden is a subtler idea and is best seen in a demand and supply figure. Suppose a market is initially in equilibrium at price P and rate of output/consumption Q. An indirect tax is then imposed in the form, say, of a constant excise tax which has the effect of vertically displacing the supply curve by the amount of the tax per unit. The new equilibrium price is Pl and the new output rate is Qx. The burden is shared (depending on the elasticities of demand and supply) between buyers and sellers. The direct cost to demanders is the rectangle labelled a, the direct cost to suppliers is b. The excess burden for demanders is c and that for

Qi Q

Rate of output suppliers is d. The excess burdens represent the value over and above their cost of production of goods and services no longer bought and sold. Since nearly all health care systems involve a degree (sometimes very large) of government expenditure, it is plain that a part of the price paid for this is the excess burden (which, incidentally, exists also in connection with direct taxes) and not just the proportion of the tax revenue accounted for by public expenditure on health care.

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