Question

• Name three types of taxes and analyze the deadweight loss of each.
• Which of these taxes do you believe create the highest deadweight loss? Why?
• Why is deadweight loss disagreed on by experts? Explain.

Answer 1

Types of Taxes

The three types of Taxes are as follows:-

1. Property Taxes – These taxes are imposed on Property owned and considered as a Wealth Tax.
2. Transactions Taxes – It is also known as Indirect Tax which is levied on transaction of Goods and Services.
3. Income Taxes & Gratuitous Taxes – It is also known as Direct Tax and levied on Income from Salary, Business or any other Source.

Deadweight Loss-

Loss of value to the market participants is greater than the Gain to the government through taxes. As a result, the economy as whole losses some value from taxation, and this complete loss is called deadweight loss of taxation.

Basically, it consist the loss of consumer surplus for buyers and producer surplus for sellers who don’t participate in the market for reasons other than the price of the product and service.

Deadweight Loss on Transaction and property Taxes:-

Transaction Taxes incur deadweight loss as the prices increase for buyers and decrease the money received by the seller.

Property Taxes on raw land incur no deadweight loss because it’s supply is perfectly inelastic. However, there is some deadweight loss from property taxes on developed land since they may impact development.

Deadweight Loss on Gratuitous Taxes-

When a person dies, government can either choose to tax the estate of the deceased person or tac the inheritance that the beneficiary receives or a combination of both, or neither because death is inevitable and because beneficiaries do nothing to earn their inheritance. Hence, no deadweight loss arises from either estate taxes or inheritances taxes