Deadweight Loss Of Taxation

A loss of economic well-being imposed by a tax. The loss occurs because taxation makes the taxed good or service less attractive, reducing individuals' desire to purchase that product. Furthermore, taxation reduces incentives to work beyond a certain point, causing individuals to prefer to take additional leisure time. The tax also causes taxpayers to suffer financially and/or to change their behavior to avoid or reduce the burden of the tax.

Such outcomes create a loss to society because the money collected as a tax could have been used in a more economically productive way, as could the time individuals spent on their tax-avoiding behavior and the time and money spent to impose and collect the tax. The more the demand and supply of a good or service change in the face of a tax, the greater the deadweight loss of taxation.