what is a deadweight loss of taxation 
deadweight loss of taxation refers to the measurement of loss caused by the imposition of a new tax this results from a new tax that is more than what is normally paid to the government s taxing authority this theory suggests that imposing a new tax or raising an old one can backfire resulting in insufficient or no gains in government revenues due to the decline in demand for the goods or services being taxed understanding deadweight loss of taxationgovernments impose taxes to collect revenues these funds are used to support public programs and projects such as infrastructure economic aid and social services federal state and local governments frequently decide to raise taxes in order to raise revenues to cover shortfalls although this action may seem like a good idea it often has the opposite effect this is called a deadweight loss of taxation or simply a deadweight loss let s look at a hypothetical example when the government raises taxes on certain goods and services it collects that tax as additional revenue taxes can result in a higher cost of production and a higher purchase price for the consumer though this may eventually cause production volumes and consumer supply to both drop leading to an increase in price and a drop in demand for these goods and services this gap between the taxed and tax free production volumes is the deadweight loss this theory was developed by alfred marshall an economist who specialized in microeconomics 1 according to marshall supply and demand are directly related to production and cost these points intersect in the middle when one changes it throws off the balance 2although there isn t a consensus among experts about whether deadweight loss can be accurately measured many economists agree that taxation can often be counter productive this makes a deadweight loss of taxation a lost opportunity cost deadweight loss of taxation may be viewed as the overall reduction in demand and the subsequent decline in production levels that follow the imposition of a tax which is usually represented graphically factors that contribute to deadweight loss of taxationthere s usually a combination of several factors that make a deadweight loss of taxation occur not all of the factors below may apply to every situation but a deadweight loss is more likely to occur when the following are present 