Question

Deadweight loss is the loss in the total surplus due to some buyers and sellers leaving the market. When tax causes deadweight loss then why it is imposed in the first place? Who gains in this situation? Also if tax has to be imposed how to determine what size of tax will generate optimum tax revenue for the government?

Answer 1

‘Tax’ – a term many among us may not like to hear, whereas may among us might be taking up taxation as their responsibility towards the government and the nation. If we define taxation or tax in simple terms , it can be explained as a medium that Government uses to charge a specific amount of money from us , which goes in to the Government pocket ,in return to the basic amenities that we enjoy from the Government side, and also as a cost to keep enjoying these and many new benefits from the Government side in the future. Tax is imposed on all citizens of a country, all corporate organization or every entity which is utilizing the government benefits to source his/her income. Deadweight loss is definitely the loss of total surplus due to some of the buyers and sellers leaving the market, however, the deadweight loss cannot be wholly accrued to taxation. There could be various other factors resulting in to deadweight loss. If only the taxation part is considered as the primary reason for deadweight loss, even then, this loss is not a justifiable reason for stopping taxation, Government imposes taxation to finance its resources, which is later utilized in the building of the basic infrastructure which is used by all individuals and entities. Moreover, it is the taxation from where the Government finances many social security programs which help many poor to survive. Moreover, the amount of deadweight loss from the economy is meagre in relation to the benefits that are derived by the people from the actions performed with the money accrued through taxation.

Optimum tax is a term which could never be materialized, since the Government of a nation is the highest level of authority which determines all the final policy and measures for the all-round growth and development of a country. Therefore, any amount of money at its disposal with actually never be enough to meet the total expenses that it desires to carry out. There is always some policy or program of the Government that received less funding, even when the Government has more than enough wealth as its disposal. This cannot be accredited as a government failure, but as a nature of Governance, where every policy or decision cannot be given equal weightage or importance a t a given point of time. Hence, the Government requirement for money will never be zero or optimum. Therefore, the Size of tax has to depend on the tax paying capability of the tax payer. The Government must fix a certain rate of taxation on the group of people whose income level ranger between certain levels, so that the poorer section of the society is having to pay the least tax and the richest section of the society is having to pay the highest percentage of tax. This form of taxation is accepted to be the most citizen friendly form of taxation, since equal weight of taxation falls on every citizen with respect to their income levels.