On the Marginal Excess Burden of Taxation in an Overlapping Generations Model

49 Pages Posted: 11 Oct 2017

See all articles by Chung Tran

Chung Tran

Australian National University (ANU) - School of Economics

Sebastian Wende

Australian National University (ANU) - Crawford School of Public Policy

Date Written: September 30, 2017

Abstract

We quantify marginal excess burden, defined as the change in deadweight loss for an additional dollar of tax revenue, for different taxes. We use a dynamic general equilibrium, overlapping generations model featured with heterogeneous agents and a realistic structure of corporate finance and taxes. Our main results, based on an economy calibrated to Australian data, indicate that company taxes are more distorting than personal income and consumption taxes. Specifically, the marginal excess burden for the company income tax is 83 cents per dollar of tax revenue raised, compared to 34 cents and 24 cents for the personal income and consumption taxes, respectively. A broader analysis of more tax instruments confirm that the relatively larger excess burden of company taxes ultimately falls on households. Importantly, the marginal excess burden is distributed unevenly across skill types, generations and ages. This highlights political challenges when obtaining popular support for raising taxes. Hence, our analysis demonstrates that marginal excess burden can be a useful tool for evaluating both efficiency and distributional implications of a tax increase at the margin.

Keywords: Taxation, fiscal distortion, overlapping generations, skill heterogeneity, corporate finance, deadweight loss, dynamic general equilibrium, welfare

JEL Classification: E62, H21, H22, H24, H25

Suggested Citation

Tran, Chung and Wende, Sebastian, On the Marginal Excess Burden of Taxation in an Overlapping Generations Model (September 30, 2017). Tax and Transfer Policy Institute Working Paper 7/2017, Available at SSRN: https://ssrn.com/abstract=3050953 or http://dx.doi.org/10.2139/ssrn.3050953

Chung Tran (Contact Author)

Australian National University (ANU) - School of Economics ( email )

Arndt Building 25B
Canberra, Australian Capital Territory 0200
Australia

Sebastian Wende

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

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