1998 Reports

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.