According to economists, an efficient tax is one that a. maximizes tax revenue for government. b. is relatively easy to collect relative to the revenue it generates. c. splits the tax burden equally between consumers and producers. d. imposes a small excess burden relative to the tax revenue it raises.

The correct answer is D. imposes a small deadweight loss relative to the tax revenue it raises.

Explanation:

By not discouraging the activity, it is understood that taxes should not distort the economic decisions of the individuals subject to taxation. In the theory of Public Finance the inefficiency of taxation can be analyzed through the so-called "excess tax", as a quantification of the loss of utility generated by a distorting tax. The excess of tax arises because the loss of total welfare generated by the tax on the individual with the modification in their behavior, is greater than the mere loss of welfare caused by the decrease in disposable income that comes with the payment of the tax. The value of excess tax that is generated by the substitution effect is greater the higher the tax rate and elasticity (Musgrave, 1986). Therefore, the relationship of exchange between efficiency and equity is not so simple for governments when designing their fiscal policy.

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