Last year when I was in a class with Professor Baker. He showed us, prior to class, a graph that I thought was very interesting.
He told us, that the best way money is spent is person 1 buys something for person 1.
The 2nd best way was when Person 2 buys something for person 1, (like a present). The welfare decreases, because the person may or may not want this present.
The worst way money is spent is by Person 1 giving money (to an unknowing third party) Person 3 to spend on Person 2. The chances that Person 2 will receive what he/she wants decreases the welfare even further.
This analogy helped me understand the disincentives of higher taxes. It seems logical to me, but or there any other thoughts on this analogy?