Taxes create deadweight loss because they prevent people from buying a product that costs more after taxing than it would before the tax was applied. Deadweight loss is the loss of something good economically that occurs because of the tax imposed. Tax on a product alone is not the only contributor to deadweight loss. People are less likely to desire and seek work when the tax imposed on them is more than what would be possible if they did not seek work or higher-paying work. They must also make changes in their spending habits to avoid taxes, further placing a burden on them and lessening their overall economic quality of life.
While taxes create deadweight loss, varies based on several factors. Two of the most important factors are whether a consumer is willing to spend on a product and how much, as well as how well a supplier can get the desired product to the consumer. This is one example of the law of supply and demand in economics. When supply and demand are not equal, more deadweight loss occurs.
Deadweight loss of taxation is looked at as time and money that could be spent in other areas of an individual's life, especially in areas that result in better spending and greater contribution to the economy. Governments can reduce their spending on tax collection if different tax policies were in place. Those people who spend hours looking for ways to avoid taxes could spend that time doing other activities that could contribute to the economy more, especially if those activities include spending in ways that put money back into the economy.