Chapter 7: Taxes - Introduction, excise tax + incidence Flashcards
Why do we tax? (4)
- alter behaviour (sin taxes)
- Fix an externality
- Raise govt revenues: govt spending
—goods and services, Transfers (redistribution)
How much do we tax? (2)
- normative
- economists think it depends on nature of taxes and political economy the most efficient
How is income redistributed?
- Quintiles
What are quintiles?
- 20% groups of the population
How do quintiles work? (2)
- Line up population by least to greatest income and divide the line into 5 equal population groups
- The first quintile is the poorest 20% of the population, the fifth is the richest 20%
Which distribution do you want? (3)
- again it is normative
- rawls “Veil of ignorance”
- self-interested behaviour
Lorenz curve graph
Why does redistribution matter?
- the rich get richer and the poor get poorer
Use income of an example of redistribution? (6)
1) income is used to acquire things, first to pick your courses, better scholarships, entrance to grad school, better jobs
2) Intergenerational Component - how well you do depends on parent’s success
3) Effort component
5) luck
6) time constraints
What is an excise tax?
- a per-unit tax on sales of a good or service
What are the effects of an excise tax? (3)
- raise the price paid by buyers
- reduce the price received by sellers
- drive a wedge between these two
What is an incidence?
- incidence of a tax is a measure of who really pays it
What does tax incidence NOT depend on? (2)
- who really bears the tax burden (in the form of higher prices to consumers and lower prices to sellers) does not depend on who officially pays the tax
- depending on supply and demand curves, the incidence of an excise tax may be divided differently
What is the wedge between the demand price and supply price called?
government tax revenue
see slide example on hotel rooms
excise tax mainly paid by consumers graph
-when PED is low and PES is high
Excise tax mainly paid by producers graph
- PED high and PES low
