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    Reduced Economic Welfare

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    Maika J. Pudadera
    Progressive taxation can reduce economic inequality even when tax revenue is not redistributed. However, most taxes reduce economic welfare by requiring unproductive labor for tax compliance or creating distortions to economic incentives. Compliance costs refer to the costs borne by businesses and individuals for keeping tax records and filling out forms. More complex tax systems have higher compliance costs. Deadweight loss occurs when taxes reduce the number of economic transactions that benefit both buyers and sellers, reducing overall economic welfare. While deadweight loss does not consider the effect of leveling the business playing field, more progressive taxation of profits could increase competition by reducing barriers to entry for new businesses.

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    Reduced Economic Welfare

    Uploaded by

    Maika J. Pudadera
    10 views2 pages
    Progressive taxation can reduce economic inequality even when tax revenue is not redistributed. However, most taxes reduce economic welfare by requiring unproductive labor for tax compliance or creating distortions to economic incentives. Compliance costs refer to the costs borne by businesses and individuals for keeping tax records and filling out forms. More complex tax systems have higher compliance costs. Deadweight loss occurs when taxes reduce the number of economic transactions that benefit both buyers and sellers, reducing overall economic welfare. While deadweight loss does not consider the effect of leveling the business playing field, more progressive taxation of profits could increase competition by reducing barriers to entry for new businesses.

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    Progressive taxation can reduce economic inequality even when tax revenue is not redistributed. However, most taxes reduce economic welfare by requiring unproductive labor for tax compliance or creating distortions to economic incentives. Compliance costs refer to the costs borne by businesses and individuals for keeping tax records and filling out forms. More complex tax systems have higher compliance costs. Deadweight loss occurs when taxes reduce the number of economic transactions that benefit both buyers and sellers, reducing overall economic welfare. While deadweight loss does not consider the effect of leveling the business playing field, more progressive taxation of profits could increase competition by reducing barriers to entry for new businesses.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    10 views2 pages

    Reduced Economic Welfare

    Uploaded by

    Maika J. Pudadera
    Progressive taxation can reduce economic inequality even when tax revenue is not redistributed. However, most taxes reduce economic welfare by requiring unproductive labor for tax compliance or creating distortions to economic incentives. Compliance costs refer to the costs borne by businesses and individuals for keeping tax records and filling out forms. More complex tax systems have higher compliance costs. Deadweight loss occurs when taxes reduce the number of economic transactions that benefit both buyers and sellers, reducing overall economic welfare. While deadweight loss does not consider the effect of leveling the business playing field, more progressive taxation of profits could increase competition by reducing barriers to entry for new businesses.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Reduced inequality[edit]

    Progressive taxation may reduce economic inequality. This effect occurs even when the tax revenue
    isn't redistributed.[citation needed]

    Reduced economic welfare[edit]


    Most taxes (see below) have side effects that reduce economic welfare, either by mandating
    unproductive labor (compliance costs) or by creating distortions to economic incentives (deadweight
    loss and perverse incentives).[citation needed]
    Cost of compliance[edit]
    Although governments must spend money on tax collection activities, some of the costs, particularly
    for keeping records and filling out forms, are borne by businesses and by private individuals. These
    are collectively called costs of compliance. More complex tax systems tend to have higher
    compliance costs. This fact can be used as the basis for practical or moral arguments in favor of tax
    simplification (such as the FairTax or OneTax, and some flat tax proposals).
    Deadweight costs[edit]

    Diagram illustrating deadweight costs of taxes


    In the absence of negative externalities, the introduction of taxes into a market reduces economic
    efficiency by causing deadweight loss. In a competitive market the price of a particular economic
    good adjusts to ensure that all trades which benefit both the buyer and the seller of a good occur.
    The introduction of a tax causes the price received by the seller to be less than the cost to the buyer
    by the amount of the tax. This causes fewer transactions to occur, which reduces economic welfare;
    the individuals or businesses involved are less well off than before the tax. The tax burden and the
    amount of deadweight cost is dependent on the elasticity of supply and demand for the good taxed.
    Most taxes—including income tax and sales tax—can have significant deadweight costs. The only
    way to avoid deadweight costs in an economy that is generally competitive is to refrain from taxes
    that change economic incentives. Such taxes include the land value tax,[50] where the tax is on a
    good in completely inelastic supply, a lump sum tax such as a poll tax (head tax) which is paid by all
    adults regardless of their choices. Arguably a windfall profits tax which is entirely unanticipated can
    also fall into this category.
    Deadweight loss does not account for the effect taxes have in leveling the business playing field.
    Businesses that have more money are better suited to fend off competition. It is common that an
    industry with a small amount of very large corporations has a very high barrier of entry for new
    entrants coming into the marketplace. This is due to the fact that the larger the corporation, the
    better its position to negotiate with suppliers. Also, larger companies may be able to operate at low
    or even negative profits for extended periods of time, thus pushing out competition. More
    progressive taxation of profits, however, would reduce such barriers for new entrants, thereby
    increasing competition and ultimately benefiting consumers. [51]

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