If tax rates are decreasing, which of the following is most likely to occur in terms of tax efficiency?

• A. Consumer and producer surplus will decrease.
• B. Deadweight loss from taxation will decrease.
• C. Tax revenue will always increase.
• D. Market distortions caused by the tax will increase.

Answer: (B)

Verified step by step guidance

1. Understand the concept of tax efficiency, which relates to how a tax affects economic welfare, including consumer surplus, producer surplus, and deadweight loss.
2. Recall that deadweight loss is the loss of total surplus (consumer plus producer surplus) that occurs because a tax distorts market behavior, causing less trade than the efficient equilibrium quantity.
3. Recognize that when tax rates decrease, the distortion to market behavior is reduced, meaning fewer trades are prevented by the tax, which leads to a smaller deadweight loss.
4. Analyze the relationship between tax rates and tax revenue: while lower tax rates reduce the tax per unit, they may increase the quantity traded, but tax revenue does not always increase with lower rates.
5. Conclude that decreasing tax rates generally reduce market distortions and deadweight loss, improving tax efficiency, rather than decreasing consumer and producer surplus or increasing distortions.