The High Cost of Raising Provincial Tax Revenues Has Gotten Even Higher

The loss of consumer and producer surplus exceeds the revenue raised by the tax by the area of the triangle abg, which is a measure of the excess burden of the tax. [...] The MCPF is equal to one plus the reduction in the value of the net output of the economy per dollar of additional tax revenue, which is called the marginal excess burden from the tax increase: Since A + B is the loss of consumer and producer surplus for a very small tax rate increase, the MCPF can also be interpreted as loss of consumer and producer surplus per dollar of additional tax revenue. [...] The tax sensitivity of a tax base can be measured by the ratio of the percentage change in the tax base to the percentage change in the tax rate. [...] The MCPF depends not only on the elasticities of the tax base and tax revenues, but also on the tax rate because a higher tax rate means a larger wedge between the value of a good or service to the consumer and the cost of supplying it and therefore a large distortion in the allocation of resources. [...] The MCPF and the Laffer Curve Source: Dahlby and Ferede (2011, 5) A third factor that affects the MCPF is the size of the tax base because the larger the tax base, measured as a share of tax revenues, the greater the deadweight loss from a tax-induced decline in the base.