DEFINITION of 'Welfare Loss Of Taxation'

The decreased economic well-being caused by the imposition of a tax. Taxing any product or activity makes it less attractive and gives people less incentive to purchase or undertake it. Taxpayers not only suffer from having less money because of the tax, they also suffer because the tax may change their behavior. Taxation results in deadweight loss which results in the economy functioning below optimal levels.

BREAKING DOWN 'Welfare Loss Of Taxation'

The market inefficiency that occurs when people change their behavior to avoid a tax creates a loss to society. A tax may cause individuals to buy less than they would prefer or to buy a different product or service than they really wanted. A tax can also cause workers to take additional leisure time rather than to work more when they know they will lose 35% of any additional dollar they earn to taxes. The higher the tax, the greater the welfare loss of taxation.

RELATED TERMS
  1. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  2. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
  3. Tax Base

    The assessed value of a set of assets, investments or income ...
  4. Tax Break

    A tax break is a savings on a taxpayer's liability. A tax break ...
  5. Direct Tax

    A tax that is paid directly by an individual or organization ...
  6. Flat Tax

    A system that applies the same tax rate to every taxpayer regardless ...
Related Articles
  1. Taxes

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  2. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  3. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  4. Taxes

    5 Most Taxing Taxes for Americans

    There’s not much that unites Americans like their hatred of taxes. Here's a list of taxes we dislike the most.
  5. Taxes

    Federal Tax Brackets

    Why do we have income tax brackets? What do they do for us? Read this to understand the basics and where to find your own bracket.
  6. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  7. Taxes

    Understanding Taxes

    Taxes are mandatory fees that individuals and corporations must pay to their governments.
  8. Taxes

    Tax Haven Vs. Tax Shelters: Is There a Difference?

    Learn about the difference between tax havens and tax shelters, and how both are used to reduce tax liability or avoid paying taxes altogether.
  9. Taxes

    Calculating Net of Tax

    Net of tax is a figure that has been adjusted for taxes.
  10. Taxes

    Who Does The Current Tax Code Benefit?

    Are the non-workers benefiting from the current tax code in any way or is it the wealthy who are still getting the big breaks?
RELATED FAQS
  1. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Answer >>
  2. What are the differences between regressive, proportional and progressive taxes?

    Understand the differences between the most common tax systems including regressive taxes, proportional taxes and progressive ... Read Answer >>
  3. What's the difference between the marginal tax rate system and a flat tax?

    Find out about the difference between marginal tax rates and flat taxes. Gain insights on both systems and the arguments ... Read Answer >>
  4. Are progressive taxes ever more unfair that flat taxes?

    Learn more about progressive taxes and flat taxes. Find out why progressive taxes may be unfair for many taxpayers and why ... Read Answer >>
  5. Do all taxes create deadweight loss?

    Learn how taxes create deadweight loss in society. Learn how this loss can be reduced, depending on certain characteristics ... Read Answer >>
  6. Is a progressive tax more fair than a flat tax?

    Find out which is more fair: flat tax or progressive tax. Learn about both sides of the debate and the challenges of defining ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center