## Wednesday, November 22, 2006

### An Expositional Challenge

It is a standard proposition in economics that the deadweight loss of a tax rises approximately with the square of the tax rate. In my favorite economics textbook, this proposition is explained in Chapter 8 using supply and demand curves and the standard deadweight loss calculation as the area of the triangle between the supply and demand curves (the area of the so-called Harberger triangle). The analysis shows that if we double the size of a tax, the deadweight loss increases four-fold; if we triple the size of the tax, the deadweight loss increases nine-fold. The graph of the deadweight loss as a function of the tax takes the shape of a parabola.

This analysis suggests that, from the standpoint of economic efficiency, reducing the highest marginal tax rates should be the greater priority of economic policymakers. (Equity considerations may point in another direction, but let's put the efficiency-equity tradeoff aside for a moment.) That is, reducing the marginal income tax rate from 40 to 35 percent for high-income taxpayers will, other things equal, generate more bang for the buck than reducing the marginal income tax rate from 15 to 10 percent for low-income taxpayers.

Earlier today, a journalist (one of the smartest ones I know, by the way) asked me how to explain the economics here to his readers. A newspaper cannot print supply and demand curves and calculate the area of deadweight loss triangles. How, therefore, should one try to explain this logic without using even high-school level mathematics? I must admit, he had me stumped. All my ec 10 students understand the logic of deadweight loss by now, but how can this famous insight be explained to a broader audience?