How More Taxes Can Be Better Than Less: A Note on Aggregating Deadweight Losses

Lancaster, Kelvin

There is a deadweight loss from imposing a tax on a single commodity, but there is no such loss from a uniform tax on all commodities with lump-sum return, and obviously no loss if no commodity is taxed. The object of this paper is to weave a consistent story relating these three well established propositions, something that has hitherto been lacking. Using a simple general equilibrium model with a CES utility function, it is shown that, as more goods are taxed: (1) The deadweight loss per dollar of revenue falls monotonically, and (2) the aggregate deadweight loss rises to a maximum, then falls to zero. In particular, it is sometimes better to tax more goods than to eliminate taxes on existing ones.



More About This Work

Academic Units
Department of Economics, Columbia University
Department of Economics Discussion Papers, 9798-09
Published Here
March 3, 2011


January 1998