The size of the lifetime excess burden of a tax

We consider a consumer intertemporal choice problem in which it is possible for the consumer to be constrained by debt limits at some time during life. By using simulation methods, we then compare the excess burden that results as debt limits become weaker until, in the limit, they do not bind. The principal finding is that the size of the excess burden is significantly affected by the presence of effective debt limits. In fact, even with a high interest rate and a high tax rate, the excess burden is insignificant if the debt limits bind in a stringent manner.