Bad Taxes

David Henderson, in a critique of Bruce Bartlett’s new book, makes a point about taxes more clearly than I have heard it made before.

On p. 177, in discussing the VAT, he writes, “consumption taxes are less burdensome because people can choose to reduce their consumption to avoid the tax.” But it’s choice that makes taxes more burdensome. In other words, the more choices people have to avoid a tax, the greater is the excess burden per dollar of revenue raised. The excess burden (deadweight loss) of a tax is proportional to the elasticity (of demand or supply), and elasticity is a measure of people’s ability to avoid. The least burdensome tax, per dollar of revenue raised, is the one that people have the least ability to avoid because that tax doesn’t distort their decisions as much.

Avoidable taxes have a hidden cost – they push people to take their less preferred options – that creates no benefit for public finances.

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