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Cost of Taxation - Cost of Taxation C h a p te r 7 2...

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1 Cost of Taxation Chapter 7-2 Taxation and Government For government to operate, it must tax. For the market to work, it needs the government. Tax rates depend on what goods and services government provides. How Much Should Government Tax? To answer this, we must know the costs and benefits of taxation.
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2 The Costs of Taxation The costs of taxation include: – The direct cost of the revenue paid to government – The loss of consumer and producer surplus caused by the tax – The cost of administering the tax codes. The Costs of Taxation A tax paid by the supplier shifts the supply curve up by the amount of the tax. The Costs of Taxation When government raises taxes, there is a loss of consumer and producer surplus that is not gained by government. This is known as deadweight loss .
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3 The Costs of Taxation Graphically the deadweight loss is shown on a supply-demand curve as the welfare loss triangle. The Costs of Taxation • The welfare loss triangle – a geometric
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