On the Welfare Benefits of Taxation

St Pierre, Charles (2017): On the Welfare Benefits of Taxation.

Abstract

A large tax wedge can lead to a dramatic increase in economic efficiency. The market share of 'deadweight loss' produced by a tax wedge consists of inefficient producers and indifferent consumers. The high costs in resources involved in production of the relatively small quantity of 'deadweight loss benefits' can be much more efficiently applied elsewhere in an economy. Because of this increase in efficiency, we find a substantial government sector and its services may be maintained essentially without cost.

We also examine the case of regulation induced wedges and deadweight loss, and find comparable results. The case of price floors we find equivocal. Monopoly and comparable economic structures can also result in improved economic efficiency.

Because the resultant deterioration of economic performance may be dramatic, tax wedges and regulations already in place should be examined carefully before their removal.

• Item Type: MPRA Paper
• Language: English
• Keywords: social welfare, taxation, tax wedge, regulation, deadweight loss, economic efficiency, opportunity costs
• Subjects: D - Microeconomics > D6 - Welfare Economics; D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies

References

(1) Wikipedia Contributors. “Deadweight Loss” Wikipedia, The Free Encyclopedia Wikipedia, The Free Encyclopedia, 13 Dec. 2016. Web. 13 Dec. 2016. <https://en.wikipedia.org/wiki/Deadweight_loss>

(2) Gilens, Martin and Page, B. I. “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens.” Perspectives on Politics 12(3) pp 564-581. doi:10.1017/S1537592714001595