Tax

====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>