8.3 Deadweight Loss and Tax Revenue as Taxes Vary

8.3 Deadweight Loss and Tax Revenue as Taxes Vary

Tax revenue varies with the proportion of the tax as a percentage of the product price. In most cases, a moderate tax rate will yield the most tax revenue, as can be seen from the first diagram above. When the tax rate is small or high, tax revenue will be less. When the tax rate is small, the government only gets a small portion of the price paid. When the tax rate is high, then the quantity sold is much less, so even when it is multiplied by the high tax rate, it yields less revenue. ^[3]

Example: If the taxes on luxury goods get high, the market for those goods get small and the tax revenue also decreases.

^{Deadweight loss and tax revenue [5]}