DEADWEIGHT LOSS OF TAXATION

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.

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