Efficiency and Equity of a Tax System

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All governments around the world use tax systems in order to raise revenue for public projects such as schools, roads, and national defense. Most people agree that taxes should impose the smallest possible costs on society as possible and that the inconvenience of taxes should be distributed fairly. This means that a given tax system should be both efficient and equitable. In making a tax system, these are the two goals of policy makers. Of course this is easier said than done because often the efficiency and equity of a tax system conflict, meaning that if the system is more efficient, it is less equitable and visa versa. In this essay, I will discuss how efficiency and equity work in a tax system and also how their conflicts make them a trade off for one another. The efficiency of a tax system is determined by how well a government can raise revenue with the smallest possible cost to the taxpayers. The most obvious cost of a taxpayer is the actual payment itself to the government. This payment is inevitable, however there are two other cost which government try to keep as small as possible to make their tax system more efficient. They are namely deadweight losses and administrative burdens that taxpayers have to put up with as they meet the terms of the tax laws. The deadweight loss of a tax is “the reduction in economic well being of taxpayers in excess of the amount of revenue raised by the government. The deadweight loss is the inefficiency that a tax creates as people allocate resources according to the tax incentive rather than the true cost and benefits of the goods and services that they buy and sell.” An example of how deadweight losses occur can be shown in an example of two people buying pizza. Suppose the first person is willing to pay $8 for a slice of pizza, and the second person is only willing to pay $6. If there is no tax on the pizza, the price

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