October 30, 2008
Almost* all taxes impose a deadweight loss on
society. If that idea is new to you, consider this simple example. Suppose a foreign power
imposes a tax of $100 on a small community. The foreign power collects the $100 and burns
Is the loss to the community $100? No, because the imposition of that tax
distorted the market.
For goods supplied in a perfectly competitive market, tax reduces economic efficiency, by introducing a
deadweight loss. In a perfect market, the price of a particular economic good adjusts to make sure
that all trades which benefit both the buyer and the seller of a good occur. After introducing a
tax, the price received by the seller is less than the cost to the buyer. This means that fewer
trades occur and that the individuals or businesses involved gain less from participating in the
market. This destroys value, and is known as the 'deadweight cost of taxation'.
The deadweight cost is dependent on the elasticity of supply and demand for a good.
Most taxes — including income tax and sales tax — can have significant deadweight costs.
(You can find a simple graph illustrating the argument
This deadweight loss implies, at least to me, that we should be careful about increasing
taxes. And particularly careful, according to economist
with imposing high tax rates, which have particularly large deadweight losses.
Standard theory says that the deadweight loss of taxation rises approximately with the square of the
So there is a powerful economic efficiency argument for broad-based taxes, with low rates.
Economic efficiency is not everything — at least for most of us — but it does set limits
on what we can do as a society.
Cross posted at Jim Miller on Politics.
(*The most important exception is a land tax. That inspired Henry George to propose a single tax on land,
and some of his followers to develop a predecessor to the game of
Tax series post 4
Posted by Jim Miller at October 30, 2008
05:43 PM | Email This
Rivers drain the land of water. If a river flows into the sea for long enough, the land will become a desert, because no mechanism exists for returning water from the sea to the land. (I refuse to consider your so-called 'clouds', you socialist liar.)
Taxes are an investment we collectively make, so that Washington state subsidizes Boeing, Microsoft, Paccar, etc. by educating future employees at UW and WSU. In return, these companies make more money, and pay their employees higher wages, so they can pay taxes, which subsidize the next generation of highly-paid employees. This works until the "get something for free" crowd confects the fantasy of the free market, and gets enough fools to accept it. Then civilization declines until our bridges fall down. Heckuva job, guys.
2. And let's not forget the economic disaster of the 80s and 90s when the "deadweight" was greater...
tensor @1 -
Thank-you for conceding the point, by attempting to change the subject. A fine example of the logical fallacy known as ignoratio elenchi.
The argument was about the pitfalls of too-high tax rates. It was not an argument against taxes, as you have attempted to reframe it.
4. "Taxes are an investment we collectively make" after, of course, the government reduces the efficiency of that investment by wasting a bunch of it on paying a bureaucracy to manage it, wasting more by spending it on non-productive investments, and wastes more by regulating any business foolish enough to accept any of the "investment" dollars.
ewaggin, before searching for fancy latin verbiage on the internet, you might try mastering reading comprehension in english:
"The foreign power collects the $100 and burns it."
That's an attempt to equate ALL taxation with plundering. It's most definitely a (mouldering, straw man) argument against any taxation. At least we know the argument is not valid:
"For goods supplied in a perfectly competitive market..."
In other words, this argument applies only to a utopia which has never existed, outside of an economics textbook.
"...wasting a bunch of it on paying a bureaucracy to manage it, wasting more by spending it on non-productive investments,"
Private businesses never do these things, of course. (Especially when run by a guy named G.W. Bush.)
If you're responding to my points about UW and WSU, please make them explicit examples of your anti-tax statements. The anti-tax movement is forty years (or more) overdue for telling the citizens which popular programs should be cut. Your telling UW and WSU grads about the inherent worthlessness of their schools should do my work for me nicely.
tensor @5 -
Thank-you for conceding the point, again, by attempting to change the subject. Another fine example of the logical fallacy known as ignoratio elenchi.
The argument was about the pitfalls of too-high tax rates. It was not an argument against taxes, no matter how many times you attempt to reframe it as such.
Is it that you are unable to respond to the argument, or just that you don't want to?