Tax

===Reduced economic welfare===
Most taxes (see [[#Deadweight costs|below]]) have [[side effects]] that reduce [[economic welfare]], either by mandating unproductive labor (compliance costs) or by creating distortions to economic incentives ([[deadweight loss]] and [[perverse incentive]]s).{{citation needed|date=October 2012}}

====Cost of compliance====
Although governments must spend money on tax collection activities, some of the costs, particularly for keeping records and filling out forms, are borne by businesses and by private individuals. These are collectively called costs of compliance. More complex tax systems tend to have higher compliance costs. This fact can be used as the basis for practical or moral arguments in favor of tax simplification (such as the [[FairTax]] or [[OneTax]], and some [[flat tax]] proposals).

====Deadweight costs====
[[File:Tax deadweight.gif|thumb|upright=1.35|Diagram illustrating deadweight costs of taxes]]

In the absence of negative [[Externality|externalities]], the introduction of taxes into a market reduces [[economic efficiency]] by causing [[deadweight loss]]. In a competitive market, the [[price]] of a particular [[Good (economics)|economic good]] adjusts to ensure that all trades which benefit both the buyer and the seller of a good occur. The introduction of a tax causes the price received by the seller to be less than the cost to the buyer by the amount of the tax. This causes fewer transactions to occur, which reduces [[welfare economics|economic welfare]]; the individuals or businesses involved are less well off than before the tax. The [[tax burden]] and the amount of deadweight cost is dependent on the [[elasticity (economics)|elasticity]] of supply and demand for the good taxed.

Most taxes—including [[income tax]] and [[sales tax]]—can have significant deadweight costs. The only way to avoid deadweight costs in an economy that is generally competitive is to refrain from taxes that change [[economic incentive]]s. Such taxes include the [[land value tax]],<ref>{{cite book|author1=William J. McCluskey|author2=Riël C. D. Franzsen|title=Land Value Taxation: An Applied Analysis|url=https://books.google.com/books?id=jkogP2U4k0AC&pg=PA73|year=2005|publisher=Ashgate|isbn=978-0-7546-1490-6|page=73}}</ref> where the tax is on a good in completely inelastic supply. By taxing the value of unimproved land as opposed to what's built on it, a land value tax does not increase taxes on landowners for improving their land. This is opposed to traditional property taxes which reward land abandonment and disincentivize construction, maintenance, and repair. Another example of a tax with few deadweight costs is a [[lump sum tax]] such as a [[Tax per head|poll tax]] (head tax) which is paid by all adults regardless of their choices. Arguably a [[windfall profits tax]] which is entirely unanticipated can also fall into this category.

Deadweight loss does not account for the effect taxes have in leveling the business playing field. Businesses that have more money are better suited to fend off competition. It is common that an industry with a small amount of very large corporations has a very high barrier of entry for new entrants coming into the marketplace. This is due to the fact that the larger the corporation, the better its position to negotiate with suppliers. Also, larger companies may be able to operate at low or even negative profits for extended periods of time, thus pushing out competition. More progressive taxation of profits, however, would reduce such barriers for new entrants, thereby increasing competition and ultimately benefiting consumers.<ref>{{Cite journal |first1=Reuven S. |last1=Avi-Yonah |date=April 2002 |title=Why Tax the Rich? Efficiency, Equity, and Progressive Taxation |journal=The Yale Law Journal |volume=111 |issue=6 |pages=1391–416 |jstor=797614 |doi=10.2307/797614|author2-link=Joel Slemrod |last2=Slemrod |first2=Joel B.|s2cid=47005504 |url=https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=4587&context=ylj }}</ref>

====Perverse incentives====
Complexity of the tax code in developed economies offers perverse [[tax incentive]]s. The more details of [[tax policy]] there are, the more opportunities for legal [[tax avoidance]] and illegal [[tax evasion]]. These not only result in lost revenue but involve additional costs: for instance, payments made for tax advice are essentially deadweight costs because they add no wealth to the economy. [[Perverse incentive]]s also occur because of non-taxable 'hidden' transactions; for instance, a sale from one company to another might be liable for [[sales tax]], but if the same goods were shipped from one branch of a corporation to another, no tax would be payable.

To address these issues, economists often suggest simple and transparent tax structures that avoid providing loopholes. Sales tax, for instance, can be replaced with a [[value added tax]] which disregards intermediate transactions.