The income tax imposed on income will cause the problem of crowding out in an economy such that there will be deadweight loss and social welfare will not be achieved. The tax that maximizes social welfare needs to be imposed on market failure which increases the government income and market will be efficient. In the negative externality, the cost of externality is borne by the third party who is not involved in the transaction of two individual who is creating externality but they bear the cost of externality. So, the government imposed the taxes in such a manner that the efficient outcome will be achieved and it causes social welfare in an economy.