Some thoughts from Tradewinds
In the study of economic the theory of Excess Burden always provokes differing thoughts. Excess Burden arises due to taxation and is what is referred to by economists as deadweight loss. VAT is a good example of a tax where the price of a good is distorted and does not reflect the equilibrium between supply and demand.
For example, some coffees, like Starbucks and Dunkin Donuts, are sold above the equilibrium price because it can be sold at near monopolistic prices making the seller excess profits. As a result, consumers will buy less coffee because of the higher price. The surplus profit made by our two brand names will be less than the value that the coffee that consumer did not purchase. The difference is deadweight loss. This concept is certainly good for Starbucks and Dunkin Donuts, but in the aggregate is not good for the economy.
Excess Burden occurs when government impose taxes on goods and services. This tax will be passed on to the ultimate consumer in the form of an increased price of the goods or services sold. Government gets the amount (increase in price) of the passed on price increase paid by the consumer. However, because of the increased price, consumers will buy less of the product than they would have otherwise. In effect tax cost is more than the money the government takes in. It also includes those goods and services that would have been consumed but will not be because of tax.
There is a hidden lesson here that perhaps is being overlooked by both government and the private sector when looking at the application of VAT to our economy. Such a sudden introduction of VAT will bring to the surface the Excess Burden Theory as consumers will respond in a similar manner as described above. Rapidly changing consumer preferences will have profound negative effects on the Bahamian economy with unexpected economic outcomes which will stymie real growth, increase unemployment, expand poverty and increase inflation.
That is why VAT is simply a Very Awful Tax.. In Part II, we shall briefly explain the neo-Keynesians view of Excess Burden.
