This paper introduces the basic concept of deadweight loss and its relevance in the taxation. The term deadweight loss also known as the Harberger triangle is an economic concept that shows the excess burden to taxpayers resulting in the imposition of taxes. It is used to calculate the efficiency cost of taxes, government regulations and other market distortions. In addition, other basic economic concepts necessary to understand the basic concept of deadweight loss such as markets, supply and demand, elasticity and tax incidence are also discussed.
The deadweight loss concept provides a measurement of the economic inefficiency due to the imposition of taxes and making it a part of the revenue estimation process will increase the accuracy of revenues estimates as compared to the use of static revenue estimate. In this regard, the revenue estimates of any proposed tax measure should include as much as possible the computation of deadweight loss to provide more accurate revenue estimates that consider the effect of taxes on the behavior of people and to enlighten fiscal policymakers about the real cost to taxpayers of any proposed tax and how to respond to such changes in behavior.
