Refer to Figure 20.3 below. Suppose the equation that equates excess burden to the tax rate can be written as EB = t 2 , where EB is excess burden and t is the tax rate.
(A) Suppose the tax rate t is initially 12 percent. How much excess burden is generated?
(B) If the tax rate doubles to 24 percent, what happens to excess burden?
(A) When the tax rate is 12 percent, EB is 0.12 2 = 0.0144.
(B) When the tax rate doubles, EB is 0.24 2 = 0.0576, which is more than double.
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