Are lump-sum taxes regressive or progressive? Is the deadweight loss of taxation the same for different types of taxes?
What will be an ideal response?
Lump-sum taxes force the rich and the poor people to pay the same amount – and thus impose a higher tax rate on the poor. Therefore, they are an example of regressive taxes. Not all taxes lead to a deadweight loss. With lump-sum taxes, all citizens in an economy would pay the government the same amount regardless of their earnings or market demand. Since they will pay the same amount in a lump-sum tax no matter what they do, the lump-sum tax does not distort their decisions. Since such taxes do not distort decisions, they do not lead to a deadweight loss. There are very few examples of real world lump-sum taxes and so virtually all taxes that people actually pay do lead to deadweight losses.
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