HE DEAD WEIGHT LOSS DEBATE

Supply, demand, elasticity, dead weight loss-all this economic theory is enough to make your head spin But believe it or not, these ideas go to the heart of a profound political question: How big should the government be? The debate hinges on these concepts because the larger the dead weight loss of taxation, the larger the cost of any government program. If taxation entails large dead weight losses, then these losses are a strong argument for a leaner government that does less and taxes less. But if taxes impose small dead weight losses, then government programs are less costly than they otherwise might be So how big are the deadweight losses of taxation? This is a question about which economists disagree. To see the nature of this disagreement, consider the most important tax in the U.S. economy the tax on labor. The Social Security tax, the Medicare tax, and to a large extent, the federal income tax are labor taxes. Many state governments also tax labor earnings. A labor tax places a wedge between the wage that firms pay and the wage that workers receive. If we add all forms of labor taxes together, the marginal tax rate on labor income-the tax on the last dollar of earnings-is almost 50 percent for many workers.

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