**3. Distortionary taxes and efficiency loss**

In general terms, distortionary taxes can be defined as taxes that will influence or change economic decisions of taxpayers. The main reason for distortionary taxation on the other hand is to assure redistribution of revenue, which is one of the fundamental functions of the state and thus to achieve a society structure more egalitarian than the one that could have been achieved via a uniform lump-sum tax [9].

The state, which has a social aim of distributing the tax burden in a fair and balanced way within the scope of fiscal policy, needs distortionary taxes in order to realize this aim. State's complete and absolute knowledge about the characteristics of each individual in the society underlies this need. In this context, use of distortionary taxes is a consequence of the aim to redistribute revenue in a world, where the state knows characteristics of individuals only incompetently [9]. Within this scope, in the assurance of justice (equality), individuals having the same ability to pay will be assumed to be in equal conditions, and same amount of taxes will be taken from them [10].

When different abilities to pay are at stake, the state redistributes revenue in a way to load a greater amount of public expenditures to higher income groups. Different societies may have different preferences on equality and efficiency. These differences bring along different tax systems in practice. Discussions on how progressive tax structure should be in order to enable equality are a result of value judgments about equality. In this context, inequality reduced through progressive tax structure can only be possible by the acceptance of a certain amount of efficiency loss.

According to Diamond and Mirrless [11], administratively, it is not possible for the state to realize its revenue distributer goal on the grounds of social justice and revenue creator goal on the grounds of public finance, through lump-sum taxes. Since lump-sum tax is not appropriate, optimal taxation will only be a taxation that will not impair the efficiency of production. This on the other hand is only possible if the taxation on the final production can be diversified between products at no cost [12].

In the light of these explanations, optimal tax structure is defined as the tax structure, which reflects the preferences of the society between the balance of efficiency loss and equality and maximizes social wealth. Optimal taxation theory seeks answers basically to the following questions:

