Glamor Economics

Chapter 164

Chapter 20 Section 9 Social Welfare Hurt by Taxes—Deadweight Loss

Over the years since the Laffer curve came out, not many countries have proved Laffer’s hypothesis, but most economists believe that taxation will reduce the total economic welfare of the society, and the excessive tax rate may not bring the government The bright future of tax increases.The loss caused by distorting incentives (or guidance) due to the government's tax policy is called "deadweight loss" in economics.American economist Mankiw called the reduction of total welfare caused by taxation the deadweight loss of taxation.

Economics believes that when the government levies a tax on a product, no matter whether the tax is levied on the producer or the consumer, it is ultimately shared by the producer and the consumer—the producer gets a price drop, and the consumer gets As prices rise, the tax drives a "wedge" between the price buyers pay and the price sellers receive.Because of this wedge, sales of this product are lower than they would be without the tax, that is, the size of the market shrinks.Due to the contraction of the market size, the sum of the welfare losses suffered by producers and consumers is greater than the tax revenue received by the government.

Why is there such a deadweight loss as a reduction in total social welfare?This is because people respond rationally to various stimuli.For example, taxes affect people's decision making.If the government taxes wheat, people will eat less wheat and more rice.If the government taxes housing, people live in smaller homes and spend more of their income on other things.If the government taxes labor income, people will work less and enjoy more leisure.Because the tax distorts incentives, it causes a deadweight loss.

Deadweight loss is the inefficiency that taxes induce when people allocate resources according to tax incentives rather than according to the true costs and benefits of the goods and services they buy and sell.Taking the automobile industry as an example, cars have now entered the families of ordinary people, but as a luxury in the past, cars carry a lot of taxes and fees, which not only limits the consumption of consumers, but also directly causes the long-term backwardness of my country's automobile industry .

A car purchase report in a certain magazine reported that taxes, fees and various complicated procedures have discouraged people's enthusiasm for car purchases.This car purchase note quoted a detailed quotation made by a salesperson for a natural person to buy "Santara" with a loan: the car price is 97800 yuan, the down payment is 10%, and the installment is 5 years, the monthly repayment is 1514 yuan, and the car damage insurance is 1414 yuan , third party liability insurance 1170 yuan, theft insurance 978 yuan, spontaneous combustion insurance 392 yuan, loan amount 78240 yuan, purchase tax 8359 yuan, vehicle inspection 500 yuan, guarantee insurance 1721 yuan, management fee 4900 yuan, other 20 yuan, down payment A total of 29234 yuan.

The charging items reported in this article are only part of the payment in the car purchase link.To buy a car, you also need to pay the parking lot certification fee, vehicle and vessel use tax... There is also a fee that the car manufacturer pays on behalf of the consumer—a consumption tax of 3% to 8%.

And car manufacturers also have tax difficulties. A car manufacturer has to bear 17% value-added tax.Cars have become the mechanical and electrical products with the highest domestic tax rate.

High taxes and fees keep the purchase price and use price of cars high, making it difficult to convert the huge potential demand into effective demand, and people's strong desire to drive their own cars is difficult to realize the car dream.Correspondingly, China's auto industry has never been able to get out of the vicious circle of high price-small market-small scale-high price.Finally, it is impossible for the government to get enough tax revenue from automobile production and automobile consumption.

A tax is like a wedge, no matter how it is driven in, it will raise prices for buyers and make them consume less.At the same time the tax lowers the price for sellers, causing them to produce less.In other words, less demand means less supply.Taxes also cause marginal buyers and sellers to leave the market, and as a result of these changes in behavior, the size of the market shrinks below the optimal level.The elasticities of supply and demand measure how responsive buyers and sellers are to changes in price, and thus determine how much a tax moves a market.Therefore, the greater the elasticity of supply and demand, the greater the deadweight loss of a tax.

Of course, when we say that taxes will bring deadweight losses, we by no means advocate the abolition of taxes.Taxation is not only the necessary driving force to maintain the operation of the state apparatus, but also the main means to maintain social fairness through redistribution.But the tax is not as high as possible. If the tax is too heavy, enterprises will lack the motivation to produce and operate, and consumers will lack enthusiasm for consumption, thus shrinking the entire economy.Therefore, tax cuts are often an important means of stimulating the economy.

[links to related words]

Consumer surplus is the difference between the price a consumer is willing to pay for a good and the actual price he pays for that good.The reason for the difference is that, except for the last unit, the marginal utility expressed in money of the commodity is greater than its price.

Producer surplus is the price a seller receives for a good or service minus the seller's cost.If the cost of a film company to provide a movie is 5 yuan, and the ticket price is 20 yuan, then the producer surplus is 15 yuan.The producer surplus of an enterprise refers to the income that the producer obtains exceeding its production cost, which is created by the laborers of the enterprise.

(End of this chapter)