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Introduction
Tax is the compulsory financial charge or other levy imposed on an individual or a legal entity by a government. Taxes consist of direct tax or indirect tax, and are paid in money and do not involve a direct exchange of goods or services. ‘Most taxes will result in a loss of efficiency and an optimal tax is one designed to minimise such losses’ (Connolly 1999, pg 160)

Indirect taxes
Indirect taxes are those paid by the consumer on goods or services they purchase and are paid to the tax collection authorities by a retailer or third party who collects the tax at the time of purchase (Connolly, 1999). This form of taxation does not take into account the characteristics of taxpayers e.g. income levels. There are two types of indirect tax:-

The first type of indirect tax is excise tax or per unit tax, where the tax base is the quantity of the item, regardless of its price for example gallons of fuel or litres of alcohol. The second type of tax is ad valorem or percentage tax. It is imposed on the basis of the monetary value of the taxable item, literally the term means ‘according to value’. This type of tax is typically imposed at the time of a transaction for example sales tax or value added tax (VAT) but it may be imposed on an annual basis (property tax) or in connection with another significant event (inheritance tax or tariffs).

The excess burden of taxation
The excess burden (or deadweight loss) from a tax system is the amount that is lost in excess of what the government collects (Auerbach,1985) and ‘gives a measure of the loss of economic efficiency associated with the imposition of tax’ (Connolly 1999, pg 196). In a competitive market the imposition of tax will affect both consumers and producers but the aim of a government will be to weight the tax either on the consumer or the producer of that good or service.

There is one tax system which in theory has...