## Dead weight loss of taxation.

This forum often brings up the moral arguments against taxation, but I think its good to see the utilitarian/economic argument as well.

Taught in most econ 101 classes, I don't think most people fully grasp the consequences of the deadweight loss associated with taxation. For those mathematically/graphically orientated the relevant graph is pretty convincing, but its got nothing on a good literary popularization.

This one is courtesy of Tyler Cowen.

Imagine that you want to go to New York on a trip. You value the trip at \$50 and a bus ticket costs \$40. Do you take the trip?

A. Yes. The value (\$50) of the trip exceeds the cost of the ticket (\$40) so you travel to New York.

How much consumer surplus (net value) do you get from the trip?

A. \$10=\$50-\$40.

The government taxes bus tickets which raises the price of a bus ticket to \$60. Do you take the trip?

A. No. The value of the trip is now less than the price of the ticket.

What happened to the \$10 consumer surplus which you used to get when there was no tax?

A. It's gone since no trip takes place.

Did the government get any tax revenue from you?

A. No.

Key idea: Consumers lose but the government does not gain from trips that are not taken.

Conclusion: Deadweight loss is the value of the trips (trades) which do not happen because of the tax.