Deadweight Loss Of Taxation

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DEFINITION of 'Deadweight Loss Of Taxation'

A loss of economic well-being imposed by a tax. The loss occurs because taxation makes the taxed good or service less attractive, reducing individuals' desire to purchase that product. Furthermore, taxation reduces incentives to work beyond a certain point, causing individuals to prefer to take additional leisure time. The tax also causes taxpayers to suffer financially and/or to change their behavior to avoid or reduce the burden of the tax.

BREAKING DOWN 'Deadweight Loss Of Taxation'

Such outcomes create a loss to society because the money collected as a tax could have been used in a more economically productive way, as could the time individuals spent on their tax-avoiding behavior and the time and money spent to impose and collect the tax. The more the demand and supply of a good or service change in the face of a tax, the greater the deadweight loss of taxation.







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RELATED FAQS
  1. Do all taxes create deadweight loss?

    Taxes create deadweight loss because they prevent people from buying a product that costs more after taxing than it would ... Read Full Answer >>
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    Standard economic analysis shows that taxes of any form, including income taxes, tend to cause deadweight loss in the market. ... Read Full Answer >>
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