Why is there a deadweight loss on personal income tax?
There are deadweight losses on almost all forms of taxation and the personal income tax is no exception to this rule. The reason why is that income taxes change behavior and taxes which change behavior create deadweight losses.TheoryIf you tax an activity, you will have less of that activity. People will do less of whatever it is that you are taxing because they are being taxed. That loss of what people would like to be doing is the deadweight loss.ConsiderationsThe existence of a deadweight loss depends upon people being able to change their behavior. So taxes on income from work, or capital gains, or excise taxes (like alcohol of tobacco), because people can change their working hours, investments or drinking and smoking, will change their behavior.Prevention/SolutionIf you tax things like land, which they’re not making any more, then you don’t get deadweight losses. For you cannot change the amount of land there is to be taxed by taxing it.Deadweight Costs and Income TaxImposing an
