Question

Which of the following statements is correct?a. A decrease in the size of a tax always decreases the tax revenue raised by that tax.b. A decrease in the size of a tax always decreases the deadweight loss of that tax.c. Tax revenue decreases when there is a small decrease in the tax rate and the economy is on the downward-sloping part of the Laffer curve.d. An increase in the size of a tax leads to an increase in the deadweight loss of the tax only if the economy is on the upward-sloping part of the Laffer curve.

Answer 1

Answer:

A decrease in the size of a tax always decreases the deadweight loss of that tax.

Explanation:

Deadweight loss of tax is defined as the harm that is caused by tax to economic efficiency and prodction. It measures by how much taxes reduces the standard of living of a population.

Deadweight loss is the difference between to tax imposed and the reduction in production level it causes.

A decrease in the size of tax will give more income free to invest in production, therefore the production level will increase. This reduces the deadweight loss.

Effect of tax on deadweight is illustrated in the attached.