Chapter 3: Taxes

Question 1

Specific Taxes

Answer 1

• Tax per unit/liter/pound
• The EFFECTIVE DEMAND CURVE shifts DOWNWARDS & PARALLEL

Question 2

Ad Valorem Tax

Answer 2

• proportional to producer price (MwSt)
• Lowers the Effective demand curve by the same proportion
  
  • No parallel downward shift

Question 3

Income Tax:

What should be taxable income

Name the two theorys

Answer 3

1. Source Theory:

• Income tax should relay ONLY on reacurring flows
• Hence, one-off payments are to be exempt

2. Comprehensive Income Concept: SHS Tax

• Income equals maximum consumption that would be possible without reducing wealth
• or wealth accregation when consumption was ZERO

Question 4

Tax Exemption

Answer 4

Exemption = part of the income is not subjdct to tax

• General Exemption shifts the tax tariff to the RIGHT
• The BIGGEST benefit of tax exemption goes to the TOP EARNERS -> Concave function

Question 5

Tax Incidence vs. Formal Incidence

Answer 5

Tax Incidence:

• WHO is carrying the economic burden of taxation? Consumer or Producer?
• Economic incidence does NOT depend on which market side the ceck gets signed
• Economic Incidence is determined by price reaction -> Elasticity

Formal Incidence:

• Who is legal obligated to pay the tax

Question 6

Tax Capitalization

Answer 6

• Future taxes decrease TODAYS value of the underlying capital by the present value of all future tax payments

Question 7

Equivalent Variation

Answer 7

• Sum the tax payer is willing to pay if goverment repeals the tax
• EV measures the loss inflicted by the tax as the size of the reduction of income that would cause the same decrease in utility as the tax
• PARALLEL SHIFT of the original budget line until it is tangent to the new indifference curve
• Excess Burden is the vertical distance

Question 8

Lump Sum Tax

Answer 8

Pauschalsteuer

• PARALLEL Shift of the budget line
• NO EXCESS BURDEN, because the revenue yield of a lump sum tax equals its Equivalent Variation

Question 9

Tax-Cut-Cum-Base-Broadening

Answer 9

• Combine a REDUCTION OF THE TAXRATES and INCREASE IN THE TAXBASE
• The reduced tax rate, will reduce the triangle (Excess Burden)
• and the Increased Taxbase will increase the tax revenue

Question 10

Tax Incidence in a small open economy

Answer 10

• Globalization of capital markets limits the ability to tax capital -> siehe Kapitalflucht

Solution: RESIDENCE PRINCIPAL

• domestic tax on return on domestic & foreign investments