In order to assess the efficiency of a tax, we should examine its effect on the behavior of individuals. In general, the less a tax affects behavior, the more efficient it is thought to be. The standard example of a non-distorting tax is a lump-sum tax, which does not change with the behavior of the taxpayer. However, this article demonstrates that behavioral distortions can and do arise from a change in even a lump-sum tax. The only truly non-distortionary tax would be one based on utility itself. Utility, which has been used as a norm for distributional analysis, is also the ideal base for efficiency analysis. In fact, any reasonable attempt to describe a minimally distortive basis of taxation will significantly resemble the notion of a tax on utility. Therefore, utility itself is the best basis for evaluation of the efficiency of a tax. Such a tax has many additional features which make it more useful for analytical purposes than lump sum taxes.
Economics | Law and Economics | Taxation-Federal | Tax Law
Date of this Version
Terrence Chorvat, "Taxing Utility" (February 2005). George Mason University School of Law Working Papers Series. Working Paper 17.