On the Welfare Benefits of Taxation

A large tax wedge can lead to a dramatic increase in economic efficiency. The market share of 'deadweight loss' produced by a tax wedge consists of inefficient producers and indifferent consumers. The high costs in resources involved in production of the relatively small quantity of 'deadweight loss benefits' can be much more efficiently applied elsewhere in an economy. Because of this increase in efficiency, we find a substantial government sector and its services may be maintained essentially without cost. We also examine the case of regulation induced wedges and deadweight loss, and find comparable results. The case of price floors we find equivocal. Monopoly and comparable economic structures can also result in improved economic efficiency. Because the resultant deterioration of economic performance may be dramatic, tax wedges and regulations already in place should be examined carefully before their removal