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The Deadweight Loss of David Foster Wallace's Tax

In his posthumous novel The Pale KingDavid Foster Wallace describes a fictional progressive sales tax in Illinois that imposes higher rates the larger the amount purchased.  Sounds good and fair — tax those who make larger purchases. Not surprisingly, it generates a substantial deadweight loss: People buy a few things, take them to their cars, then come back and buy more.  Auto dealers sell parts separately to reduce the average tax rate on consumers. If this sales tax was real, the deadweight loss would be borne especially heavily by low-wage people.  Those who feel pinched for cash but whose time is less valuable would be more likely to engage in tax-avoiding activities like repeated small purchases.  (HT to TW)


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