As a tax increases,the excess burden from increasing the tax grows faster than the corresponding tax revenue.This is the impetus behind _____.
A)lump sum taxes
B)the excess burden rule
C)the Ramsey rule
D)placing taxes only on the most inelastic goods

Question

Quizplus · Accepted Answer

The Ramsey rule, also known as the optimal commodity taxation theory, suggests that in order to minimize excess burden (i.e. the loss of efficiency caused by taxation) while still raising revenue, taxes should be levied on goods with low price elasticity of demand. This is because as taxes increase, the demand for these goods will not significantly decrease, resulting in less excess burden. Therefore, the Ramsey rule aligns with the statement that as tax increases, the excess burden grows faster than the corresponding tax revenue.

As a Tax Increases,the Excess Burden from Increasing the Tax