Question

Chapter 8 (section 8-1) discusses the dead weight loss from various types of tax plans. How would you change the tax system to promote equality, efficiency, and/or economic growth?

Answer 1

Loss of total welfare due to taxes is dead weight loss.The dead weight loss of taxation means the  harmful effect of tax on economic efficiency and production.Dead weight loss is the difference that is measured when a new tax is levied and the decrease in output because of the tax .Due to the taxes,the cost of production increases and so the price of the product increases.Production volume decreases . The dead weight loss is the gap between the tax free production and the taxed production.Since taxes increase the price of the good , the supply curve shifts to the left and the quantity purchased by the buyers fall.Taxes create dead weight loss because the goods and servies on which they are imposed have elastic supply or demand.If tax is imposed on good which are in inelastic supplyor demand , dead weight loss will not be created .

The most important thing to do is encourage tax cut which will increase demand by increasing disposable income.  At the same time business should be encouraged to to increase their investment. Reduced tax rate will boost saving and investment andthe productive efficiency of the economy will be improved. In order to reduce income inequality, taxes should be progressive ie high income households need to pay alarger share of their income as taxes to the Federal government than lower income households.But Federal taxes has not been much effective.By redistributing income through several policies of the government, income inequality can be reduced.