Journaling of Chapter 8: Application: The Costs of Taxation

     Chapter 8 further dives into the subject of welfare economics and focuses on taxation. This chapter introduces us into the idea of deadweight loss of taxation which is the reduction in total surplus that results from a tax.  The greater the elasticity is for supply and demand, the greater the deadweight loss of the tax will be. Also, deadweight loss increases as a tax increases. This leads us into the ideas of Arthur Laffer. Laffer believed in supply-side economics and came up with the implication that if tax rates are extremely high, instead of bringing increased revenue for the government it will reduce quantity. Thus, a reduction in tax rates would cause an increase in total revenue given to the government.

     I am not sure what economist’s side I am regarding Laffer’s theory. I think that Laffer’s argument would only work in extreme cases such as the situation in the 1980s that took place in Sweden. I think this chapter was pretty simple because readers have already been introduced to how taxation works. This chapter just goes more deeply into it and shows how tax revenue is affected by varying degrees of taxes.  Though taxes are undoubtedly necessary, it does cause society to lose some of the benefits of efficient markets. This chapter gave me a good basis for understanding the economic impact on taxes and I look forward to learning more about taxation and how taxes will influence the overall economy. I give this chapter a 1 out of 3 difficulty rating.