ABSTRACT
The notion that raising a dollar of taxes could cost society more than a dollar is one of the most powerful ideas in economics. The reasoning is simple. By causing agents to alter their behaviour as a result of the tax – consumers buy less, for example – the tax lowers welfare by more than it collects in revenue. The difference, often referred to as a ‘deadweight loss’, leads to the marginal cost of raising a dollar of public funds being higher than a dollar.
