We all know that if the government impose a tax on a product, then tax revenue is less than loss in consumer and producer surplus. This is known as deadweight loss.

We also know that taxing is a contractionary fiscal policy. Imposing a tax reduces inflation. So the real value of the social welfare is actually increased in this way.

As a result, some of the deadweight loss is conpensated by reduction in inflation.

Is this line of reasoning valid? If it is true, then does the reduction in inflation completely conpensate the loss or only partially conpensate it? If this is not true, what's wrong?


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