Measuring Welfare Changes and the Excess Burden of Taxation

The aim of studies of the welfare change imposed by actual or hypothetical price changes is to provide a money measure of the change in welfare facing different types of individual. In public finance contexts the price changes are considered to arise from the imposition of, or changes in, commodity and income taxes. This gives rise to the concept of the excess burden resulting from taxation, reflecting the excess of the money measure of welfare change over the tax revenue, in well-specified situations. There is a corresponding concept of the marginal excess burden arising from a change in taxation. It may also be required to provide an overall evaluation of a change in taxation, using a specified social welfare, or evaluation function that reflects the value judgements of the judge.