Lesson 8 Taxes Flashcards
Tax Incidence
1) study of how burden of tax distributed among various people in economy
Impact of tax on ice cream cone sellers
1) Affects supply curve
2) Supply curve shifts left –> taxes lower effective price –> supply curve shifts up by same amount
3) Price + quantity increases
Effect of taxes
1) discourage market activity –> quantity sold is smaller in new equilibrium
2) buyers + sellers share tax burden
3) taxes on sellers/buyers are EQUIVALENT
Impact of taxes on ice cream cone buyers
1) impact on demand curve
2) curve shifts left (goes down by exact size of tax)
3) equilibrium quantity + price both drop
Can lawmakers legislate true burden of a tax
1) no, depends on supply + demand
2) payroll tax creates a wedge btwn what firms pay + what workers receive
Relationship btwn elasticity + taxation
1) Tax burden heavier on side of market that is less elastic
2) WHY –> small elasticity –> do not have good alternatives to consume the good –> so if good is taxed, they’ll be less willing to leave market bc lack alternatives
why did a luxury tax hurt suppliers more than the rich customers
1) Luxury tax –> on goods like yachts (relatively elastic) compared to the actual shipyards (inelastic in short run) –> burden goes on suppliers
Welfare of buyers + sellers
1) buyers = measured by consumer surplus
2) sellers = measured by producer surplus
Government tax revenue
1) rectangle btwn supply + demand curve (to left of deadweight loss)
2) above price sellers receive + below price buyers pay
What do demand + supply curves represent
1) demand = buyers willingness to pay
2) supply = producers costs
Deadweight loss
1) fall in total surplus that results from government taxes
2) losses to buyers + sellers from tax EXCEEDS revenue raised by govt
3) Tax increases price for buyers, so buyers buy less + increases costs for sellers so sellers produce less –> reduces optimum
Tax on a good is deadweight loss if
1) reduction in consumer + producer surplus is greater than tax revenue
What determines if deadweight loss is large or small
1) depends on price elasticities of supply + demand
2) Large elasticities of supply/demand –> greater deadweight loss of a tax
relationship between deadweight loss of tax + size of tax
1) if tax doubles –> deadweight loss quadruples
Deadweight = .5 * base * height
tax doubles
deadweight = .5 * (2base) * (2height) = 4X
What happens if government taxes too much?
1) people would stop buying/producing the good + no revenue would be raised
Laffer Curve shows that
1) you could sometimes reduce tax on a good + increase tax revenue
2) stems from idea that govt is on wrong side of Laffer curve –> (sadface parabola)
If tax is increased by 50%, what happens to govt revenue
1) would increase by less than 50%, may even decline
Calculating
1) tax per unit
2) total tax revenue
3) total amount paid by consumers
4) total amount tax paid by producers
5) total expenditure
6) total revenue for firms
1) look at VERTICAL distance btwn old + new curve
2) take that tax per unit and MULTIPLY by quantity of items (creates a rectangle/square to left of deadweight loss)
3) consumers = draw a line from old equilibrium to price axis, portion of square/rectangle above is consumer burden
4) portion below is producer burden
5) price X quantity of new equilibrium point
6) new price (equil price - tax) * quantity
