Question

Public Finance text book, Rosen & Gayer, 10th ed. Chapter 15, question #2. Question #2: Suppose that your neighbor is willing to pay you $100 to do some home repairs for her. You would be willing to do the job for $80. so you strike a deal. Now suppose that the government levies a tax of $25 on all home repair transactions. You pay up your gear and leave your neighbor's home, because it is no longer worthwhile for you to do the job. As a result of your leaving the job, you do not have to pay the @25 tax. Relate this scenario to the concept of excess burden.

Answer 1

Excess burden of tax is the economic loass that the economy suffers due to excess taxes or subsidies. In this case the home repairs would have been done if the tax had not been levied. Due to the tax, the profit for the person doing the job is wiped out and this gives him no incentive for working in the society.Hence there is excess burden of taxation.