3250:200 Lecture Notes - Lecture 12: Deadweight Loss, Progressive Tax, Tax Deduction
16 Nov 2017
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Document Summary
To perform its many function, the government raises revenue through taxation. A tax on a good reduces the market quantity of that good. The government can only determine the size of the tax not the share of the burden. The burden of a tax is shared between buyers and sellers depending on the price elasticities of demand and supply. The size of the deadweight loss also depends on the elasticities of demand and supply. One tax system is more ef cient than another if it raises the same amount of revenue at a smaller cost to taxpayers the costs to taxpayers include : the tax payment itself, deadweight loss, administrative burden. Taxes distort incentives, cause people to allocate resources according to tax incentives rather than true costs and bene ts the result : a deadweight loss. The fall in taxpayers well being exceeds the revenue the government collects.
