The term Deadweight Loss of Taxation refers to the measurement of loss caused by the imposition of a new tax. This results from a new tax that is more than what is normally paid to the government's taxing authority. The excess burden of taxation, also called the distortionary cost of taxation, arises because different taxpayers have different capacities to pay taxes and respond to incentives created by taxes.In economics, this is measured by how much people are willing and able to produce or purchase with their after-tax income. When this graphically illustrated on a demand and supply diagram it creates two L-shaped curves: one for pre-tax equilibrium (no tax) and one for post-tax equilibrium (with tax). Deadweight losses are shown as the shaded area between these two curves.The most obvious deadweight loss occurs when someone decides not to work or sell goods or services because of the increased cost brought about by taxation.For example, if someone earning $50,000 per year decides not to work an extra hour in order to avoid paying additional taxes, there is clearly a lost economic benefit since that person would have earned an additional $50,000 in wages over the course of a year (assuming they worked 40 hours per week).Other costs can include less investment due both current investments being made as well as potential investments being forgone due higher taxes; people working less hours; companies changing their prices upward in order pass along some portion Taxes onto consumers; black markets forming where goods & services are bought & sold outside taxed economy etc.
