02A Holcombe Capitulo 10

CHAPTER 10 Positive Principles of Taxation 180
CHAPTER 10
Positive Principles of Taxation

The, first nine chapters of the text were concerned primarily with what the government does and
why. The next several chapters focus on how the government raises revenues to finance its
activities. The, government has three primary ways of raising revenue: taxation, borrowing, and
money creation. Borrowing and money creation are discussed in chapter 23. Chapters 10,
through 16 cover taxation. Taxation, deserves substantial coverage because the bulk of
government revenues in the United States is raised through taxation. Even with a substantial
federal budget deficit, more than 90 percent of all government revenues are raised through
taxation.
The principles of taxation can be divided into two general categories. The first category
is positive principles of taxation, which concerns the effects of taxation. Positive principles of
taxation analyze who bears the burden of taxes and what other economic effects can be expected
to result from the imposition of taxes. The most important positive principles of taxation are tax
shifting and the excess burden, or welfare cost, of taxation. Chapter 10 is devoted to these and
other positive principles of taxation.
The second category of taxation deals with tax policy. Included in this chapter such
issues as who should bear the burden of taxation and what criteria people might use to determine
each person's fair share of the tax burden. Ultimately, these normative questions revolve around
how tax policy can be used to design as desirable a tax system as possible. Of course, what
constitutes a fair and desirable tax system depends upon the positive effects of particular types of
taxes, so before the non-native issues can be discussed, the, positive issues of taxation must be
understood.
After looking at the positive and normative aspects of tax policy, the political incentives
involved in developing tax policy must be explained to provide a fuller understanding about how
tax policy is designed. The positive principles of taxation discussed in this chapter can be used
as a foundation for understanding the effects of different types of taxes and the process by which
tax policy is determined.

TAX SHIFTING

The principles of tax shifting apply to all types of taxes, but, for purposes of simplicity, they will
be examined first within the framework of a unit tax, which is a tax charged per unit of a good
exchanged. For example, cigarette taxes typically are applied as a certain amount per pack of
cigarettes, taxes on beer are set as a fixed amount per can, and gasoline is taxed at a certain
amount per gallon. In each case, the amount of tax due is based on the number of units sold. By
contrast, these taxes could be set as ad valorem taxes, which would be based on the dollar value
of the goods sold. For example, an ad valorem tax might be 12 percent of the value of beer sold,
whereas a unit tax might be 10 cents per can of beer sold. A retail sales tax, which is calculated
as a percentage of retail sales, is always a type of ad valorem tax, but excise taxes, which are
taxes placed on particular types of goods, can be either unit or ad valorem taxes.


A Unit Tax Placed on Suppliers

What will happen if a unit tax is placed on the suppliers of a good produced in a competitive
market? This situation is illustrated in figure 10.1, which depicts supply curve S, demand curve
D, equilibrium price P*, and quantity without a tax Q*. Because suppliers have to pay a unit tax
on every unit of the good they sell, each unit is more costly by the amount of the tax, which
shifts the supply curve up by that amount. The new supply curve is labeled S + Tax, with the
arrow between S and S + Tax indicating that the curves differ by the amount of the tax. Given
the tax and the resulting new supply curve, the price rises to Pd and the quantity produced
declines to Q', determined by the intersection of the demand curve D with the new supply curve
S + Tax. Just as one might expect, when a tax is placed on the supplier in the market, the price
goes up and demanders end up bearing some of the burden of the tax.

Note, however, that the price does not go up by the full amount of the tax. The tax is the
distance between S and S + Tax, but the distance from P* to Pd is less than the tax. Tracing
down from the intersection of S + Tax and D to the old supply curve S gives the total amount of
the tax, which means that the revenue per unit left for the supplier after the supplier pays the tax
is P
s.
That is, P
s
is the price per unit that goes to the supplier after the tax is paid. This means
that although the tax is initially placed on the supplier, part of the tax burden is shifted to the
demanders in the form of a higher price and the rest of the tax ends up being paid by suppliers.
This phenomenon is known as tax shifting because although the tax is initially placed on the
suppliers, some of the tax is shifted to demanders. The arrow drawn up from P* shows the
proportion of the tax home by demanders, while the arrow pointing down from P* shows the
proportion of the tax home by suppliers. These proportions will vary depending upon the
elasticities of supply and demand, which will be discussed in more detail later in the chapter.

A Unit Tax Placed on Demanders

Now consider the effect if an excise tax of the same amount per unit is placed on demanders in
the market rather than on suppliers. This is illustrated in figure 10.2. Here, the supply and
demand curves are the same as in figure 10.1, but the excise tax causes the demand curve to shift
downward to DCTax. When purchasing a good, demanders are concerned with the total price
they have to pay, so if a tax is placed on a good, their demand will fall by the amount of the tax.
Thus, the difference between D and DCTax is the amount of the tax.

With the new demand curve, the equilibrium price is P
s
, and the new equilibrium quantity
is Q', determined by the intersection of the new supply and demand curves, S and DCTax. The
market price falls from P* to P
s,
which shifts some of the tax originally placed on the demanders
to the suppliers. But while demanders pay P
s
to suppliers, they must also pay the tax, which is
the difference between DCTax and D. Tracing up from the intersection of S and DCTax to D
shows the amount of the tax, and demanders end up paying P
d
for the good, including both the
amount the pay suppliers and the amount they pay in tax. As in figure 10.1, the arrow in figure
10.2 drawn up from P* indicates the proportion of the tax paid by demanders and the arrow
drawn from P* indicates the proportion paid by suppliers.

A Tax on Suppliers versus a Tax on Demanders

As figures 10.1 and 10.2 illustrates, a tax placed on suppliers in market can be partially shifted to
demanders and a tax placed on demanders can be partially shifted to supplies, so that in either
case, suppliers and demanders end up sharing the burden of the tax. What difference does it
make, then, if the tax is placed on the suppliers or on the demanders in the market? This
question is addressed in figure 10.3, which uses the S and D curves from figures 10.1 and 10.2, S

+ Tax curve from figure 10.1, and the DCTax curve from figures 10.2. In effect, figure 10.3 is a
composite of figures 10.1 and 10.2 to see what differences there are in the two cases.

The distance between S and S + Tax is the same as the distance between D and DCTax
because both are equal to the amount of the tax. Thus, the heavy arrow in figure 10.3 shows the
amount of the tax in both cases. Note that the supply curve shifts up in the first case by the same
amount that the demand curve shifts down in the second case. This means that Pd in figure 10.1
is the same as P
d
in figure 10.2 and that P
s
is the same in figure 10.1 as Ps in figure 10.2. In both
cases, the amount paid by the demander, including the tax, is the same regardless of whom the
tax is initially placed upon, and the amount received by the supplier after the tax is paid is the
same regardless of the initial placement of the tax.
Thus, it makes no difference whether the tax is placed on the suppliers or the demanders
in a particular market. Each ends up bearing the same tax burden no matter who is taxed
initially. However, the tax paid by the suppliers usually will not equal the tax paid by demanders
because the proportion of the tax paid by each group will depend upon the relative elasticities of
supply and demand. The group upon whom the tax is initially placed is said to receive the impact
of the tax, but, once the tax is implemented, this analysis shows that the burden of the tax can be
shifted to others. The ultimate burden of the tax, after shifting has taken place, is called the
incidence of the tax. This analysis shows that the impact of a tax and the incidence of a tax can
be substantially different.
This analysis shows that the actual burden of a tax may be different from the legal
assignment of a tax. For example, consumers may be charged a sales tax, but some of this tax
might ultimately be home by suppliers. Likewise, the Social Security payroll tax nominally is
shared evenly between employers and employees, but because the employees are suppliers of
labor and the employers are demanders, the actual burden of the tax would be the same whether

the entire tax was paid by the employees, whether it was paid by employers, or whether it was
split between them as it is now. Changing the impact of this tax will not change its incidence.
Regardless of what the government says, the laws of supply and demand determine who
ultimately bears the burden of a tax.

ELASTICITIES AND TAX INCIDENCE

The preceding analysis shows that regardless of which side of the market a tax is initially placed
upon, the proportion of the tax ultimately home by suppliers and demanders will remain the
same. What those proportions will be is determined by the relative elasticities of supply and
demand in the taxed market. The effects of elasticities on tax incidence can be summarized as
follows. In general, the more elastic the schedule, all other things held equal, the more the
burden of the tax will fall on the other side of the market. For example, the more elastic the
demand curve, the smaller the proportion of the tax paid by demanders and the larger the
proportion paid by suppliers. Conversely, the more elastic the supply curve, the greater the
proportion of the tax that will be shifted to demanders. In the extreme case of a perfectly
inelastic supply curve, the entire tax will be home by suppliers. For a perfectly elastic supply
curve, the entire tax will be shifted to demanders. These ideas can be illustrated graphically.

Figure 10.4 resembles figure 10.1 in that it shows a tax placed on suppliers in a market.
In figure 10.4, DE is a relatively elastic demand curve, and D
1
is a relatively inelastic demand
curve. Figure 10.4 compares the effects of an identical tax on suppliers using the two demand
curves to show what difference the elasticity of demand makes. For DE, the burden of taxation
can be found, as in the previous section, by adding the amount of the tax to the supply curve.

With demand curve DE, the quantity exchanged is reduced to QE, at the intersection of DE and S
+ Tax, and the tax is represented by the arrow closest to the P axis. If, instead, the demand in the
market was the more inelastic demand D
1
, the quantity exchanged will be Q
l
, where D
1
intersects
S + Tax, and the tax is represented by the arrow farther away from the P axis. Recall that it
would make no difference if we put the tax on the demanders instead of the suppliers, so the
effects of the elasticity of demand are the same regardless of the initial impact of the tax.
A comparison of these two cases shows two things. First, the more elastic the demand
curve, the more the quantity exchanged is reduced. The implications of this will be discussed
shortly. Second, the more elastic the demand curve, the greater the share of the tax paid by
suppliers and the smaller the share paid by demanders. This illustrates the general principle that
the more elastic the schedule, the greater the percentage of the tax that is borne by the other side
of the market. The same thing will be true on the supply side of the market. The reader is
invited to draw a graph like figure 10.4, but with a more elastic and less elastic supply curve, to
verify that the more elastic the supply curve, the greater the proportion of the tax that is home by
demanders.

Perfectly Elastic or Perfectly Inelastic Supply

Figures 10.5 and 10.6 show two extreme cases. In figure 10.5, the supply curve is perfectly
inelastic, representing some good for which there will always be a fixed supply on the market.
With a perfectly inelastic supply curve, a tax can be put on the demanders, but the entire tax will
be shifted to suppliers. In this case, the market price does not shift as a result of the tax, and P*
= P
d
. Note also that when the supply curve is perfectly inelastic, the quantity exchanged is not
affected by the tax. The same principle holds for the other side of the market. If the demand
curve is perfectly inelastic, the entire tax will be home by demanders, and the quantity
exchanged will not be affected.


Figure 10.6 illustrates the other extremeCa perfectly elastic supply curve. In this case,
the entire tax is home by demanders. With the entire tax shifted to the demand side of the
market, P* = P
s
, and the price paid by demanders, including the tax, rises by the full amount of
the tax. The reader can verify that the same would hold true for a perfectly elastic demand curve.
With perfectly elastic demand, suppliers will bear the entire burden of the tax. The case of
perfectly elastic supply is relevant to competitive industries characterized by constant costs
because the long-run industry supply curve will be perfectly elastic. In this case, whether a tax is
put on suppliers or demanders in a competitive constant-cost industry, in the long run demanders
end up bearing the entire burden of the tax.

These conclusions make intuitive sense if one thinks about them. An inelastic supply or
demand schedule means that the suppliers or demanders are unwilling to substitute out of the
good in question. If this is so, then the group can do little to avoid a tax on the good because the
inelastic schedule implies that it will not alter its quantity much in response to a change in price.
Conversely, an elastic supply or demand schedule means that the group is willing to forgo
supplying or demanding the good in question if the price changes adversely. In this case, to keep
the elastic suppliers or demanders from leaving the market, the other side of the market has to
bear most of the burden of the tax. Simply stated, the more willing the group in question is to
substitute out of the taxed good, the more able it is to force the other side of the market to bear
the burden of the tax.

Shifts in the Tax Burden

The general principles just depicted graphically can also be illustrated algebraically. In figure
10.1 (or any of the other figures), the burden of the tax home by demanders will be P
d
- P*, while
the burden placed on suppliers will be P* - P. Thus, the ratio of the demanders' share of the tax

to the suppliers will be (P
d
- P*)/(P* - P
s
), which is the ratio of the change in the demanders
price paid to the change in the suppliers price received after the tax is paid. Both the numerator
and denominator of this expression can be divided by (Q*-Q'), which is the change in the
quantity exchanged, without changing the ratio, to yield

(P
d
- P*)/(Q* - Q')
(P* - P
s
)/(Q* - Q')

This expression is the ratio of the slope of the supply curve to the slope of the demand curve,
which means that the ratio of the burden of the tax home by demanders to the burden home by
suppliers will be equal to the ratio of the absolute values of the slopes of the demand curve and
the supply curve.
Although no general relationship exists between the slope of a curve and its elasticity,
when two curves pass through the same point (as, for example, the demand curves in figure
10.4), the flatter curve is the more elastic. Thus, the more elastic the curve is, the greater the
share of the burden home by the other side of the market. Furthermore, at the point of
intersection, the ratio of the slopes will be equal to the ratio of the elasticities, so that for small
changes, the ratio of the burden home by suppliers to the burden home by demanders will be the
ratio of the elasticity of supply to the elasticity of demand. Economists often prefer to think in
terms of elasticities rather than slopes, but we should note that the precise relationship is between
the ratio of the slopes of the curves and the share, of the tax ultimately home by each side of the
market.
1
To summarize, taxes placed on one group in an economy can be shifted through the
market to other groups so that the individuals on whom a tax is initially placed will not
necessarily be the ones who ultimately bear the burden of the tax. More specifically, the more
elastic a supply or demand schedule is, the greater will be the proportion of the tax that can be
shifted to the other side of the market. But the proportion of the tax home by demanders will be
the same regardless of whether the tax is initially levied on suppliers or demanders, and the same
will be true of suppliers. Finally, the ratio of the demanders burden to the suppliers' burden will
be equal to the ratio of the slopes of the supply and demand curves.
These principles of taxation were illustrated in a simple framework, but the basic
principles apply to conditions in a more complex world. For example, workers supply be labor to
firms, and firms also buy inputs from other firms. Thus, if a tax is placed on away a firm, that tax
can be shifted backward to the firm's suppliers, including its workers, whom and forward to the
firms demanders-its customers. Thus, it is very unlikely that the party on whom a tax is initially
levied will bear the entire burden of the tax, and it may even be able to shift the entire burden of
the tax to other parties. The principles just discussed will be very useful in future chapters when
the effects of specific taxes are analyzed.

THE WELFARE COST OF TAXATION

The welfare cost of taxation is sometimes referred to as the excess burden of taxation or the
deadweight loss of taxation. All three terms mean the same thing. The welfare cost of taxation
arises because the taxpayers not only must pay the tax to the government but also will alter their
behavior in response to a tax to avoid the tax to some degree. The cost involved in behaving
differently to try to avoid the tax results in a burden on the taxpayer over and above the dollar
amount of the tax paid, so it is referred to as an excess burden. There is an excess burden because

taxpayers would have been better off if they simply could have paid the same amount in taxes
without having to alter their behavior than they are when the tax also pushes them to behave
differently.
For example, suppose that the government decides to raise more revenue by placing a tax
on gasoline. Taxpayers will be worse off for two reasons. First, they must pay the tax every
time they purchase gasoline. Second, the tax will cause the price of gasoline to rise, which
causes consumers to reduce their consumption of gasoline. This means that the tax not only
collects revenue, but it also alters consumers consumption bundles away from what they thought
were optimal to consume without the tax. The change in consumption imposes the excess
burden on consumers because it gives them an incentive to consume a less-preferred mix of
goods, lowering their utility in the process. Recall that when a tax is levied in a market, the
quantity exchanged in that market declines, and the substitution out of the taxed good is
responsible for the welfare cost of taxation.
This concept is illustrated graphically in figure 10.7, which closely resembles the other
figures in the chapter. The tax per unit is Pd - Ps, as in the earlier examples. The quantity
exchanged is Q' after the tax is imposed, so the amount of tax collected is (P
d
- P
s
) X Q', the area
of the shaded rectangle in figure 10.7. For example, if there is a 10 cent per gallon tax on
gasoline, and 1,000 gallons are sold, then the total tax collected would be the 10 cent tax per
gallon times the 1,000 gallons sold, or $100. The tax per unit in figure 10.7 is (P
d
- P
s
,), which
corresponds to the 10 cent per gallon tax, and Q' is the quantity sold. The area of a rectangle is
its base times height, and the base of the shaded rectangle is the quantity sold while its height is
the tax per unit, making the shaded area a graphical representation of the amount of tax revenue
collected from the tax.

The excess burden of the tax results from the decline in consumption of the taxed good from
Q* to Q'. The tax prevents those units from being exchanged, so the net benefits to buyers and
sellers from those lost exchanges will not be realized. The welfare cost of the reduction in output
from Q* to Q' can be calculated by taking the value to buyers that would have been realized from
consuming additional units and subtracting the opportunity cost to sellers from producing the
additional units. Using the demand curve as a measure of the marginal gain to consumers from
consuming additional units of the good and the supply curve as a measure of the opportunity cost
of producing the good, the net gain that could have been produced from the units between Q' and
Q* is the area in the shaded triangle between the demand and supply curves. This triangle
represents the dollar value of the burden of taxation resulting from the altered behavior because
of the tax, in the same way that the shaded rectangle represents the dollar value of the tax
revenues collected. Considering the payment of taxes as a burden, this welfare loss is an excess
burden of taxation. That excess burden exists because the tax alters peoples behavior in
addition to collecting revenue from them.
Within this framework, consider the costs of taxation to taxpayers. The shaded area
marked Tax in figure 10.7 represents the amount of taxes paid by the taxpayers in this market.
This is a cost to the taxpayers, but the revenues from this tax are then used to pay for public
sector goods and services. The more darkly shaded area marked Excess Burden of Tax
represents the cost to taxpayers in terms of foregone output in this market. Output level Q*
would have been produced without the tax, but the tax alters peoples behavior in the market and
causes Q' to be produced. This is a cost to the taxpayers just as much as the dollar amount of the
taxes they pay, but whereas the revenues from the tax can be used to pay for public sector output,
the cost of the excess burden is simply lost. Thus, the government produces output that
presumably has some social value in exchange for the revenues it collects, but the total tax cost
of government output is the dollar expenditure plus the excess burden associated with the raising
of the tax revenue.

The Excess Burden as a Cost of Taxation

Because the excess burden represents one of the costs of taxation, it should be taken into account
when calculating the total cost of taxation to finance activities in the public sector. The tax with
the minimum excess burden is most desirable from an efficiency standpoint because it produces
the least social cost for the revenues it raises. To minimize the social cost of taxation, one of the
goals of tax policy is to minimize the excess burden of the tax system.
A look back at figure 10.4 can help illustrate how this might be done. Note that when a
tax is placed on a good with a more elastic demand, the quantity exchanged falls more than when
the tax is placed on the good with the less elastic demand. Thus, placing, a given tax on a good
with a more inelastic demand tends to minimize the excess burden of the tax. This becomes even
more obvious in the extreme case depicted in figure 10.5. In that case, when the supply curve is
perfectly inelastic, the quantity exchanged is not affected by the tax, so the tax causes no excess
burden. In general, the excess burden of a tax can be minimized by placing larger taxes on goods
with very inelastic demand or supply schedules. When supply or demand is inelastic, the group
with the inelastic schedule will not alter its behavior appreciably no matter what happens to the
price of the good. If the tax does not affect individuals behavior, there will not be an excess
burden.


Lump Sum Taxes

A tax that completely eliminates the excess burden of taxation is called a lump sum tax. The
amount of a lump sum tax would not vary no matter what an individual does, so there would be
no way taxpayers could alter their behavior to avoid the tax. The simplest example of a lump
sum tax is a levy of a certain amount that would have to be paid by every individual at the time
that the tax was announced. For example, the government could announce that as of today,
everyone owes the government a tax payment of $1,000, with no exceptions permitted. Because
there would be no way to avoid paying the tax, the tax would have no effect on the behavior of
people (except that they would have to come up with the money to pay the tax), which means
that it would have no excess burden. If there is no action people could take to reduce their tax
burden, then the tax has no excess burden. A lump sum tax is ideal from an efficiency standpoint
because it minimizes the excess burden of taxation.
A lump sum tax might be held as a theoretical ideal of an efficient tax, but it is difficult to
conceive of how lump sum taxes could be applied in the real world. For example, if the
hypothetical $1,000 tax were extended so that from now on everyone had to pay a tax of $1,000
every year in the future, it would be in effect a tax on having children because children could not
be expected to earn their own money to pay the tax. An income tax gives people an incentive to
earn less income and take more leisure, and a property tax gives people an incentive to minimize
improvements to the value of their property. Indeed, it is difficult to think of a tax that will not
cause people to alter their behavior in some way to avoid the tax.
A tax in a market with a completely inelastic supply or demand could act like a lump sum
tax if it signified that people would never alter the quantity supplied or demanded of the good-in
other words, if the good really were of fixed supply or if demanders would always demand a
constant amount under any circumstances. Although a tax on such a good might qualify as a
lump sum tax, no such fixed supply or demand for a good actually exists. And for many goods
that have relatively inelastic demands, there is frequently a reluctance to tax them for reasons of
equity. Medical care is often cited as a good with relatively inelastic demand, yet medical
services and drugs tend not to be taxed at all so as not to place an additional burden on those who
need the care. Food is another category of goods that have a relatively inelastic demand, yet in
many states there is no sales tax on food, again for equity reasons.
In general, goods we think of as necessities have relatively inelastic demands, yet it is
argued that necessities should not be taxed for reasons of fairness. Conversely, luxury goods
have relatively elastic demands, yet they are typically taxed at higher rates, again for reasons of
fairness. Thus, in the attempt to minimize the excess burden of taxation, equity issues often
conflict with efficiency issues. From an efficiency standpoint, the best tax is one with the
minimum excess burden because the tax imposes the lowest total cost on an economy for a given
amount of revenue raised.

EXCESS BURDEN AND INDIVIDUAL CHOICE

The principle of the welfare cost of taxation can also be illustrated with indifference curves to
show how the excess burden of taxation makes individuals worse off than if a lump sum is used.
Consider the individual whose utility function is depicted in figure 10.8. The individual is faced
with the budget constraint X
1
Y
1
, without a tax and chooses to consume the combination of X and
Y given by point A. When a tax is placed on good Y, the budget constraint rotates inward to

budget constraint X
1
Y
1
N. At this new budget constraint, the individual can consume the same
amount of X as before the tax on Y if the individual consumes only good X. However, the
amount of Y that the individual can consume if he consumes only Y will fall as a result of the
tax. By considering the tax in this way, it is easy to see how the budget constraint would rotate
to illustrate a tax on one of the goods. With the tax placed on good Y, the slope of the budget
constraint has changed, and because the slope of the budget constraint depicts relative prices, the
new slope illustrates that with the tax on good Y, the price of Y relative to X has risen.

With this tax placed on good Y, the individual will now consume the combination of X
and Y given by point B, where the individual's indifference curve is tangent to budget constraint
X
1
Y
1
' . By being on a lower indifference curve, the individual is worse off at point B than at
point A for two reasons. First, the individual is worse off because of the amount of the tax paid
and, second, because the tax causes the individuals behavior to change to try to avoid paying
some of the tax. To avoid paying the tax associated with good Y, the individual consumes less
of Y. From the consumer's standpoint, the excess burden arises because the tax increases the
relative price of the taxed good, Y.
If instead of levying a tax on good Y, a lump sum tax is applied, the same amount of tax
can be collected without the excess burden. The amount of the tax collected can be measured in
terms of either good X or good Y, but in either case it is the distance from point B to the original
budget constraint. A new budget constraint, X
2
Y
2
, can be drawn running through point B but
parallel to the original budget constraint. Along this new budget constraint the same amount of
tax can be collected as at point B, but relative prices remain the same as along the original
budget constraint.

The new budget constraint depicts the effect of a lump sum tax on the individual that
raises the same amount of revenue as the tax on good Y. The utility-maximizing point for the
individual point is C. Because point C is on a higher indifference curve than point B, the
individual is better off with the lump sum tax than with the tax on good Y. The difference in the
individuals well-being is the difference in utility between the indifference curve at point B and
the higher indifference curve at point C. Note that at point C, the individual consumes more Y
than at point B, where Y is taxed. This illustrates that the individual substitutes out of the taxed
good because its price is higher. The difference in the individual's utility at point C when
compared with point B is the excess burden of the tax on Y, because it is the utility loss the
individual suffers because the tax pushes the individual to change his behavior to avoid the tax.
The excess burden exists because a tax, in addition to taking tax revenue away from the
taxpayer, discourages the consumption of the taxed good. The taxpayer is better off if the tax
simply extracts the revenue without altering the relative prices facing the individual. Compare
the individuals situation at point B and point C. The tax revenue is the same in both cases, but
the relative price of good Y is increased on budget constraint X
1
Y
1'
. This makes the individual
worse off because the tax gives the individual the incentive to substitute out of the consumption
of good Y, creating the excess burden. At point C, the lump sum tax allows the individual to
purchase X and Y at their original relative prices, so the individual consumes more of good Y.
The individual is better off because the consumption choices are not distorted by the lump sum
tax. The efficiency characteristics of a lump sum tax are so attractive that it is too bad lump sum
taxation is not more feasible in the real world.

Inelastic Labor Supply and the Welfare Cost of an Income Tax

In considering the excess burden of a tax, we have argued that if either the supply or demand
curve for a good is completely inelastic, there will be no excess burden from a tax in that market.
This is true because individuals in the market will not alter their supply or demand quantity
under any circumstances. In other words, they will not substitute out of the taxed market. This
section considers that idea in more detail to show that the unwillingness to substitute is the
crucial element in the argument. A perfectly inelastic schedule might result from offsetting
income and substitution effects, however, and it is the substitution effect that is the key
component in minimizing the excess burden. If there are offsetting income and substitution
effects, the substitution effect still creates an excess burden. If there is no substitution effect, then
there is no excess burden.
This can be illustrated by viewing the effect of an income tax on labor supply. Consider
the reaction of an individual to an increase in an income tax. The higher tax makes it more
costly to supply labor relative to taking leisure time, so the individual will want to substitute out
of work and into leisure. But the higher tax will also mean that the individual has less income
and will want to work harder to make up for the income that has been taxed away. In this case,
while the substitution effect makes it relatively more attractive not to work, the income effect
causes the individual to want to work more. The two effects work in opposite directions.
It is possible that the individual might work the same amount with or without the income
tax, so the individuals labor supply curve will be perfectly inelastic. However, because there is
still a substitution effect, the individual will still be better off with a lump sum tax than with a tax
on income. This can be illustrated in figure 10.9, which is similar to figure 10.8. Here the
individual worker has twenty-four hours a day to allocate to either work, which earns income, or

leisure. The amount of leisure time is recorded on the horizontal axis, and the slope of the
budget constraint shows the rate at which leisure time can be transformed into income through
working. With no income tax, the individual locates at point A, just as in the previous figure.

An income tax raises the relative price of earning income because the individual must
now work more hours to take home the same amount of income, so the budget constraint rotates
inward, and the individual chooses to locate at point B. Note that at both points A and B, the
individual chooses sixteen hours of leisure a day and works eight hours a day. Because the
individual works the same amount regardless of the income received for working, the
individuals labor supply curve is completely inelastic.
However, in this case the inelastic labor supply curve is due to offsetting income and
substitution effects. If the individual pays a lump sum tax designed to raise the same amount of
revenue as the income tax, the budget constraint for the lump sum tax will pass through point B
but will be parallel to the original budget constraint, and the individual will choose to be at point
C. At point C, the individual works more (takes less leisure) and the individuals after-tax
income rises from I
1
to I
2
. As in figure 10.8, the excess burden of the income tax is the
difference in the welfare of the individual at point B as compared with point C. Because the
individual is on a higher indifference curve at point C, the individual is better off with the Jump
sum tax than with the income tax. It is apparent from looking at figure 10.9 that although the
individual does have a perfectly inelastic labor supply curve, the tax does cause the individual to
substitute out of income, which is taxed, and into untaxed leisure. The individual works less at
point B than at point C.

Utility Functions and Excess Burden

A perfectly inelastic supply or demand curve implies that there will be no excess burden from a
tax in that market because the tax does not cause people to substitute out of the taxed good, so
the tax does not alter peoples behavior by changing their consumption patterns. Consumption
changes only because people have less income and not because they substitute out of the good
being taxed. However, the example in the preceding section shows that a perfectly inelastic
schedule can result from offsetting income and substitution effects, giving rise to an excess
burden resulting from the substitution effect. A tax on the good causes people to substitute out of
the taxed good. People actually do consume less because of the tax, although they consume more
because of the reduced income. Thus, as long as there is some substitution effect in response to a
change in the relative price of a good, there will be an excess burden from a tax in that market.
For a tax to have no excess burden, there must be no substitution effect that causes
individuals to substitute away from the taxed good because of its higher relative price. That case
is diagrammed in figure 10.10. The original budget constraint is X
1
Y
1
, and because of a tax on
good Y, the budget line shifts to X
1
Y
1
', and the individual consumes at point A. If the individual
is taxed the same amount but relative prices are unchanged, the budget line would be X
2
Y
2
. For
there to be no substitution effect, the individual would still have to consume at point A, so the
individual's indifference curves must be 90 degree angles, like the indifference curve labeled U
o
.
In this case there is no substitution effect, so there is no excess burden. In figure 10.10, no
indifference curve was drawn on original budget constraint X
1
Y
l
. Can you draw in the
indifference curve on the original budget line under the assumption that the individual always
consumes the same amount of Y no matter what the individual's income or relative prices? Can
you draw in an indifference curve on the original budget line under the alternative assumption
that the individual does not substitute because of relative price changes, but that the good is a
normal good and that consumption will rise when income rises?

Although it is an interesting exercise to try to draw in the indifference curve on budget
constraint X
1
Y
l
, that indifference curve is not relevant to the excess burden of taxation. The
excess burden arises because of the substitution effect alone, and the income effect is irrelevant.
As figure 10.10 illustrates, people must have very unusual preferences for a tax to have no excess
burden, but the figure also allows us to imagine what makes the excess burden larger or smaller.
The closer indifference curves are to right angles, the less people will substitute because of price
changes, which will reduce the excess burden. Individuals will substitute more when
indifference curves have little curvature, which will make the excess burden larger.

MINIMIZING THE EXCESS BURDEN OF TAXATION

This chapter deals mainly with the theory of taxation rather than specific applications of tax
principles. Nevertheless, the reader should have a sense of the general magnitude of the welfare
cost of taxation. Clearly, the tax system does influence the behavior of individuals, whether by
discouraging the consumption of some goods relative to others, influencing an individuals
choice of occupation, or altering a corporations production decisions.
One study has estimated that the welfare cost of the tax system in the United States is
between 13 and 24 cents per dollar of revenue raised.
2
This is hardly an insignificant figure.
Because government spending accounts for more than one-third of GDP, the results of this study
suggest that the welfare cost of the tax system is at least 5 percent of GDP. Given the magnitude
of the excess burden of taxation, there is good reason to want to try to minimize it.

The Ramsey Rule

The Ramsey rule, named after its originator, is a theoretical proposition explaining how the
excess burden of taxation can be minimized for a given amount of tax revenue to be raised.
3
The
Ramsey rule states that to minimize the excess burden of taxation, taxes should be placed on
goods in inverse proportion to the elasticity of demand for the goods. In other words, if the tax
on a good is represented by T and its elasticity of demand by E, then the condition defining the
optimal tax on goods 1 and 2 to minimize their combined excess burden can be stated as

TI/T2 = E
2
/E
l

Proving this proposition in a formal manner is a complex undertaking, but the logic behind it is
relatively straightforward.
4
We have already seen that the more elastic the demand for a good is, the greater will be
the excess burden from a tax on that good. This implies that taxes should be placed on goods
with inelastic demands, assuming that supply elasticities are the same. Indeed, the Ramsey rule
summarized in the equation just given does specify that the larger tax is placed on the good with
the more inelastic demand and the smaller tax on the good with the more elastic demand. The
reason why the tax is shared between the goods rather than placed all on the most inelastic good
to minimize the excess burden is that as a tax becomes larger, its excess burden increases more
rapidly than the size of the tax. This can be illustrated in figure 10.11
Figure 10.11 shows the marginal increase in the excess burden of taxation as a result of a
tax increase. For the sake of simplicity, we will consider a market in which the supply curve is
assumed to be perfectly elastic. (This would be the case in the long run in a competitive constant-
cost industry.) With equilibrium price P* and quantity Q* without the tax, a tax equal to T is

placed on the good. The price rises to P* + T and the quantity falls to Q'. The amount of the tax
collected is the rectangle with the vertical side from P* to P* + T, shown by the short arrow, and
horizontal side from the origin to Q'. The excess burden is represented by the small shaded
triangle between Q' and Q*.

Now assume that the tax rate is doubled from T per unit to 2T per unit, as shown by the
longer arrow. However, because the higher tax will lead to a lower quantity being exchanged,
the tax revenue will less than double as a result of a doubling of the tax rate. Note that the darkly
shaded square, which was part of the tax revenue collected with the smaller tax, is no longer
collected because the quantity exchanged in the market has fallen from Q' to Q". But while the
tax revenue has not doubled, the excess burden of the tax has more than doubled, and now
encompasses the entire shaded area.
As figure 10.11 suggests, when a tax becomes larger, the excess burden from increasing
that tax grows faster than the corresponding tax revenue. Therefore, even though it makes sense
to place larger taxes on goods with more inelastic demands, there is a trade-off between placing
ever-larger taxes on inelastic goods and placing some smaller taxes on goods with more elastic
demands. How should these taxes be placed to minimize the excess burden? This is where the
Ramsey rule comes in. The excess burden of the tax is minimized when taxes are levied in
inverse proportion to the elasticities of demands for the goods.
This does represent a bit of an oversimplification for several reasons. First, we have
neglected to consider the elasticities of supply for the goods, but it should be evident that the
same type of relationship will hold. Also, we have assumed that goods are unrelated in
consumption (neither complements or substitutes), so that a tax on one good will not affect the
demand for another good. But these simplifying assumptions should not detract from an

understanding of the underlying principle of the Ramsey rule, which is that to minimize the
excess burden of taxation, goods with relatively inelastic demands should be taxed more heavily
than goods with relatively elastic demands.

The Marginal Cost of Public Spending

The Ramsey rule gives the optimal mix of taxes for a given level of taxes. The principle behind
the Ramsey rule is that when a tax is placed on any given market, the excess burden of the tax
increases more than proportionally with the tax. With a linear demand curve, for example, a
doubling of a tax rate produces four times the excess burden but less than twice the tax revenue.
From this it follows that the cost of public projects exceeds the dollar amount spent on them, but
it also follows that the larger government spending is already, the greater will be the cost of
increasing government spending by a given amount.
Refer again to figure 10.11 for an illustration of this point. Assume that a public project
is proposed that will cost Q' T to complete, which will be raised by a tax in the market in figure
10.11. If there are no taxes currently in that market, the cost of the project will be Q' T plus the
excess burden represented y the small shaded triangle between Q' and Q*. The excess burden
must be included as one of the costs of undertaking the project. Now assume that the market
already has tax T, and the project proposal suggests raising the tax to 2T. We have already seen
that increasing the tax from T to 2T will not double the revenue, but the marginal excess burden
is the shaded rectangle plus the shaded triangle between Q" and Q'. Compare the tax revenue
and marginal excess burden from initially placing tax T on the market with increasing tax T to
2T. The increase from T to 2T raises less additional revenue than the initial tax T, but the
marginal excess burden is three times as large. The higher tax rates are already, the greater will
be the marginal excess burden of any additional taxes.
5
One implication of this is that a project that might be justified based on a comparison of
the dollar outlays of the project and the projected benefits of the project might not be cost-
effective if the excess burden of taxation is included, and the higher taxes already are, the more
likely it is that the excess burden will be sufficiently high to cause a project not to be cost-
effective. Some projects that would be justified on the basis that the benefits exceed the costs if
the government were spending 15 percent of GDP will not be justified if the government is
spending 35 percent of GDP, simply because the higher excess burden increases the social cost
of the project.
6

ADDITIONAL COSTS OF THE TAX SYSTEM

It should be apparent by now that there are costs to taxation over and above the dollar amount of
taxes paid. The excess burden is one example, but there are other costs imposed by taxation as
well, including compliance costs, administrative costs, and political costs.

Compliance Costs

Anyone who has filled out an income tax form will be familiar with compliance costs, which are
the costs imposed on taxpayers to comply with the tax laws. Collecting and keeping records is a
big part of compliance costs, as are the costs involved in filling out tax forms and filing taxes. If
a taxpayer is audited, additional compliance costs are incurred in demonstrating to the
government that the taxpayer indeed is in compliance.
7

Many individuals, and almost all businesses, find the tax laws so complex that they hire
accountants and tax lawyers to help them comply with the tax laws and to help find ways of
minimizing their tax burdens. The largest compliance costs are home in conjunction with the
income tax because it is the most complicated tax to compute, but even relatively simple taxes,
such as the sales tax, have compliance costs.
Although compliance costs are difficult to measure, one study has estimated that
compliance costs for the individual income tax in the United States are between 5 percent and 7
percent of the revenue raised from the tax.
8
Between 5 percent and 10 percent of compliance
costs are the result of taxpayers hiring professionals for tax assistance, but most of the costs are
due to the taxpayers time involved in complying with tax laws. The U.S. personal income tax
uses about two billion hours yearly of taxpayers' time to comply. Because this includes only the
personal income tax, it is clear that compliance costs are a significant part of the cost of taxation
as a whole.

Administrative Costs

Whereas compliance costs are home by taxpayers, administrative costs are home by the
government to collect taxes. For example, the Internal Revenue Service (IRS) must print and
mail forms to taxpayers, process the completed returns, and mail refund checks to those who are
due refunds. All these cost the government money. The IRS also has auditors to check on
taxpayer compliance, and the auditing procedure itself is expensive. Records must be kept for
any type of tax, so administrative costs include tax collection and record keeping. Although
administrative costs are significant, most economists believe that in the United States,
compliance costs exceed administrative costs by a considerable margin. That is, it costs
taxpayers more money to pay their taxes than it costs the government to collect them.

Political Costs

Another cost associated with the tax system is the political cost home by taxpayers and the
government as a result of taxpayers trying to influence tax laws. The tax laws are always subject
to modification, and taxpayers continually attempt to change the tax laws in their favor. For
example, Realtors have incurred considerable costs hiring lobbyists to try to retain-and, indeed,
improve-the home mortgage interest deduction, one of the largest deductions on federal income
tax returns. The lobbying effort of Realtors represents a real cost of using the tax system, and
their efforts have paid off. In the major tax reform act passed in 1986, all personal interest
expenditures were eliminated as deductions from federal taxable income except the home
mortgage interest deduction. This is a good example of the welfare cost of rent seeking, which
was discussed in chapter 9. In this case, rent seeking has taken place to try to secure benefits
through the tax system.
Realtors are not alone, of course, in lobbying for favorable tax treatment. Businesses
lobby to improve write-offs for depreciation, research and development, and so forth.
Individuals who work at home try to modify the tax laws to make it more favorable to deduct
expenses for home offices. It is difficult to estimate the political costs to both taxpayers and the
government that political activities aimed at influencing tax legislation generate, but, as noted in
chapter 9, taxpayers have an incentive to expend up to the amount of the expected value of the
change in the tax law to get legislation passed. Political costs associated with the tax system must
be substantial.

EARMARKED TAXES

Earmarked taxes are taxes whose revenues are designated to a particular spending activity. For
example, tolls collected at a toll bridge may be earmarked toward paying for the bridge, the
federal gasoline tax is earmarked toward the building of highways, and a federal tax on airline
tickets is earmarked toward airport and airway improvements. The largest earmarked tax is the
Social Security payroll tax, which is earmarked toward paying Social Security benefits to
recipients. All these taxes are earmarked because the tax revenues from the particular source go
toward a particular spending area.

General Fund Financing versus Earmarking

General fund financing is the alternative to earmarking. With general fund financing, the tax
revenues are placed in a general fund, from which government programs are financed. For
example, at the federal level, personal and corporate income taxes, and federal taxes from a
number of other sources, are collected and placed in the Treasury, and Congress then allocates
this money out of a general fund to finance expenditures on national defense, education, natural
resources, and other programs. Money is spent on these programs independently of where the
money is raised. As an alternative, the corporate income tax could be earmarked for national
defense in the same way that the Social Security payroll tax is earmarked for Social Security, but
it is not. With general fund financing, the legislature has much more discretion over how
revenues are spent, whereas with earmarking, the revenues from the earmarked tax must be spent
on a particular activity.
As with the taxes on gasoline and airline tickets, earmarked taxes are often used in cases
in which the taxed activity is closely related to the ultimate use of the funds. In these cases,
earmarked taxes are similar to user charges. However, as the hypothetical Defense Department
example suggests, the earmarked tax source need not be closely related to the ultimate
expenditure. Earmarked taxes only must be collected for a specific purpose.
Earmarked taxes are most often used at the local level of government. For example,
schools are often funded by a specific portion of the local property tax, though school funding
methods do vary considerably from state to state. Some states earmark property taxes for
schools, while others finance their elementary and secondary education out of the general fund of
a larger budget, such as a city or county. In some areas, a portion of the sales tax could be
earmarked for a specific purpose. For example, 1 percent of the sales tax might be earmarked
toward financing a new courthouse or county jail.

The Advantages and Disadvantages of Earmarking

Funding government programs entirely by earmarked taxes lacks the flexibility of general fund
financing because a particular tax base may be too small or too unstable to provide the revenue
generation for a given program that citizens desire. The other side of that problem is that if
revenues from an earmarked source grow larger than the level of expenditures that would be
warranted, too much might be spent on a particular area, or funds might build up unspent while
other government programs suffer from too little revenue. If citizens are allowed to vote on the
level of expenditures of various government to decide programs for which taxes are earmarked,
they have a much better opportunity to receive the amount of public sector output they find most

satisfactory. For example, if citizens can vote on the amount of property tax revenue that will go
toward financing public schools, they are more likely to get the level of education they want than
if public schools are financed out of a general fund.
With general fund financing, policymakers will have significant discretion regarding the
expenditures that are made from tax revenues. This might help to increase the efficiency of
expenditures, but, in a political environment, sometimes policymakers can manipulate the
budgetary mix to increase spending on particular programs under general fund financing. For
example, a city council might desire additional expenditures to improve the offices at city hall,
while taxpayers are more interested in police and fire protection. Under general fund financing,
it would be possible for the city council to allocate a larger-than-optimal share of the budget to
city hall improvements and a smaller-than-optimal share to police and fire protection. Voters
would then vote for a larger level of government expenditures to get the increased police and fire
services they want, and the city council could then get the money for the office improvements
that it wants. By skewing the expenditure mix away from those expenditures voters most favor,
policymakers can alter expenditures to increase the overall level of expenditures demanded by
voters.
9
Earmarked revenue sources provide the benefit of making it clear to taxpayers how much
they pay for particular activities of government. For example, most taxpayers have a better idea
about how much the Social Security system costs them than how much they pay for national
defense. However, earmarked taxes are also less flexible than general fund financing. Still,
earmarking has much to recommend it because the government is required to allocate revenues
to particular expenditures before the fact, making the cost of government clearer to taxpayers.

CONCLUSION

The principles of taxation can be divided into two general groups: positive and normative.
Positive principles of taxation examine the effects of taxes on individuals and the economy. Two
important positive principles of taxation are tax shifting and the welfare cost of taxation. Tax
shifting refers to who ultimately bears the burden of a tax. Taxes initially placed on one group
can be shifted through the market so that they end up being home by another group. When a tax
is placed on a particular market, the ratio of the tax ultimately home by the demanders or
suppliers is equal to the ratio of the slope of the demand curve to the slope of the supply curve.
The welfare loss of taxation, also called the excess burden or deadweight loss of taxation,
is the cost a tax places on the economy over and above the tax revenues collected. In addition to
collecting revenue, a tax gives people an incentive to alter their behavior to reduce the amount of
tax they pay. When people substitute out of taxed activities, this generates a welfare loss. The
less people are willing to substitute out of a taxed activity, the smaller will be the excess burden
of taxation. Therefore, the excess burden of taxation can be minimized by placing higher taxes
on goods with relatively inelastic supplies or demands.
Other positive principles of taxation, such as earmarking of taxes and compliance,
administration, and political costs, are also relevant to the evaluation of specific taxes. Thus,
these positive principles of taxation will be applied to the analysis of specific taxes when they are
discussed in upcoming chapters. The general principles of taxation discussed in this chapter
serve as a foundation for understanding the details of particular taxes that are used in the
economy. The costs of raising tax revenues are significant as a percentage of the revenues
raised, and one of the goals of the tax system is to be as efficient as possible by minimizing the
welfare costs of taxation.

Positive principles give us a good foundation for analyzing the tax system, but they only
tell us about the effects of taxes. Tax systems are designed not only to raise revenue efficiently
but also to raise it fairly. Thus, equity in taxation is an important issue. The fairness of a tax
system can only be evaluated once the actual effects of a tax are understood. For example, we
might arrive at very different conclusions about the fairness of a tax if we did not take account of
the fact that the group that bears the burden of a tax might not be the group upon whom the tax is
initially placed. The next chapter extends the theme of this chapter by examining normative
issues related to tax system is a product of human design, through our political institutions.

QUESTIONS FOR REVIEW AND, DISCUSSION

1. What are the three methods by which the government can finance its expenditures?

2. Explain the difference between a unit tax and an ad valorem tax.

3. What is meant by tax shifting? Who bears the burden of an excise tax placed on the suppliers
of a good? Who bears the burden of an excise tax placed on the demanders of a good?
Using a graph, compare the effects of a tax placed on the suppliers of a good with a tax of
the same magnitude placed on the demanders.

4. Explain what the terms impact and incidence mean with regard to taxes. What determines the
impact of a tax? What determines the incidence?

5. In a market in which an excise tax is levied, how can one compute the ratio of the tax paid by
the suppliers to the tax paid by the demanders?

6. What is meant by the excess burden of taxation? How is the excess burden measured, and
why does it arise? What can be done to minimize the excess burden of revenue raised by
taxation?

7. What makes a tax efficient? Discuss some of the issues involved in trading off equity and
efficiency in the design of tax systems.

8. Can a tax have an excess burden if the supply curve in the market is completely in elastic?
Explain, using labor supply as an example. Use your explanation to illustrate exactly what
gives rise to the excess burden of taxation.

9. What is the Ramsey rule? Explain the logic behind the Ramsey rule.

10. Assume that a public project is expected to cost $10 million in direct outlays and is expected
to produce $11 million in benefits. How will the excess burden of taxation affect the
determination on whether this project wi11 be cost-effective? Is it possible that the project
could be cost-effective if the government is small but not cost-effective if the government is
larger? Explain your answer.

11. What is an earmarked tax? Discuss the advantages and disadvantages of earmarking. Would
it be feasible to earmark all taxes?


NOTES FOR CHAPTER 10

1. In Richard A. Musgraves classic treatise, The Theory of Public Finance (New York:
McGraw-Hill, 1959), he states that the ratios of the elasticities are equal to the ratios of the
burdens of the tax shares of demanders to suppliers. This is not quite true for the arc
elasticity, which would be appropriate for a discrete change of this type.

2. Charles L. Ballard, John B. Shoven, and John Walley, The Total Welfare Cost of the United
States Tax System: A General Equilibrium Approach, National Tax Journal 38, no. 2 (June
1985): 125-40.

3. Frank P. Ramsey, A Contribution to the Theory of Taxation, Economic Journal 37 (1927):
47B61.

4. For a more detailed discussion of the Ramsey rule, see Chin W. Yang and Kenneth R. Stitt,
The Ramsey Rule Revisited, Southern Economic Journal 61, no. 3 (January 1995):
767B74.

5. This point is made by Edgar K. Browning, The Marginal Cost of Public Funds, Journal of
Political Economy 84, no. 2 (April 1976): 283B98.

6. Some estimates done in the 1980s suggest, first, that it is difficult to get a precise estimate of
the excess burden of taxation at the margin but, second, that it would not be unreasonable to
believe that the marginal excess burden of taxation is 25 percent or more of the amount of
revenue raised by taxation. See, for examples, Charles L. Ballard, John B. Shoven, and John
Whalley, General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the
American Economic Review 75, no. 1 (March 1985): 128B38; Charles Stuart,
Welfare Costs per Dollar of Additional Tax Revenue in the United States, American
Economic Review 74, no. 3 (June 1984): 352B62; and Edgar K. Browning, On the Marginal
Welfare Cost of Taxation, American Economic Review 77, no. 1 (March 1987): 11B23.

7. Joel Slemrod, ed., Why People Pay Taxes: Tax Compliance and Enforcement (Ann Arbor:
University of Michigan Press, 1993) discusses these compliance costs and the way in which
they influence peoples decisions to obey tax laws.

8. Joel Slemrod and Nikki Sorum, The Compliance Cost of the U.S. Individual Income Tax
System, National Tax Journal 37, no. 4 (December 1984): 461B74.

9. This idea is explained in James M. Buchanan, The Economics of Earmarked Taxes,
Journal of Political Economy 71 no. 5 (October 1963): 457B69.

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CHAPTER 10 Positive Principles of Taxation 180

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