Principles of Tax Analysis Flashcards
Statutory incidence
the legal burden of a tax
Economic incidence
the study of who really bears the burden of a tax (consumers or producers)
Tax shifting
price changes between statutory and economic incidence.
*Short run incidence often differs from long run incidence. Other factors effecting tax incidence are the time horizon and open verses closed economy issues.
.*Short run incidence often differs from long run incidence. Other factors effecting tax incidence are the time horizon and open verses closed economy issues.
Balanced budget incidence
when we examine the burden of a tax and the expenditure that the tax revenue funds.
Differential incidence
examines how burdens differ when one tax is substituted for another.
Lump-sum tax
tax that can not be avoided by changing behavior. Often used as a reference point.
Partial equilibrium tax incidence
use to determine who bears a tax levied in a particular market
When do we use Partial incidence
Appropriate when we think the effects of the tax will be confined to that market.
Sources and Uses
Taxes affect the distribution of income through both.
*when determining the incidence of a tax on a commodity, we typically ignore the effects on the sources side. We ignore the effects on the uses side when analyzing a tax on an input.
when determining the incidence of a tax on a commodity, we typically ignore the effects on the sources side. We ignore the effects on the uses side when analyzing a tax on an input.
**The incidence of a tax is independent of whether it is levied on producers or consumers. That is, tax incidence can be determined either by shifting the demand curve (to find net-of-tax or effective demand curve) or the supply curve (to find gross-of-tax-supply or the effective supply curve).
**The incidence of a tax is independent of whether it is levied on producers or consumers. That is, tax incidence can be determined either by shifting the demand curve (to find net-of-tax or effective demand curve) or the supply curve (to find gross-of-tax-supply or the effective supply curve).
Tax Wedge
The difference between the price paid by consumers (Pg) and the price received by sellers (Pn). Determined by the relative elasticizes of the supply and demand curve.
Property Tax
The incidence of a tax on land
Tax Capitalization
When the price of an asset falls to fully reflect the value of future tax payments
General equilibrium incidence
When a tax is imposed on a sector that is “large” relative to the rest of the economy, we must consider other markets related to the taxed factor.
**The Harberger model is a useful general equilibrium model of tax incidence in the two-good, two-factor case.
**The Harberger model is a useful general equilibrium model of tax incidence in the two-good, two-factor case.
Distortionary tax
Any tax that changes relative prices, and therefore generates substitution effects. Example: a tax on a commodity.
Horizontal equity
A principle of taxation under which people in similar circumstances should pay similar amounts of tax; “equal treatment of equals.”
Vertical equity
A principle of taxation under which people in different circumstances should pay different amounts of tax. In particular, it is presumed that people with a greater ability to pay (with more income or wealth) should pay higher taxes.
Effective tax rate
The ETR is a measure of the average tax burden. It is calculated by dividing total tax payments T by total income I. ETR = T/I. This is also called the AVERAGE tax rate.
Progressive tax
A tax under which the effective tax rate (the proportion of income that gets paid in taxes) rises as income rises.
Regressive tax
A tax under which the proportion of income paid in taxes falls as income increases.
Tax incidence
Often called economic incidence, this is the study of who really bears the burden of a tax, i.e., the change in the distribution of private real income brought about by a tax. The economic incidence of a tax will generally be different from the statutory incidence (on whom the tax is legally levied). Only people can bear taxes.
Unit tax
An excise tax under which the tax rate is expressed as an amount of tax per unit purchased. (Example: cigarette and liquor tax).
Ad valorem tax
A tax under which the rate is expressed as an amount of tax per dollar of economic transaction. Excise taxes can be ad valorem taxes, as are income taxes, payroll taxes.
Excise tax
A tax levied on the purchases of a specific commodity.
Partial equilibrium
This analysis examines the effect of a tax only in the market in which the tax is imposed. Effects in and interactions with other markets are ignored.
General equilibrium
An economic analysis that considers interactions among several markets.
Excess burden
A loss in welfare above and beyond tax revenues collected. Also referred to as dead weight loss or welfare cost of taxation.
Consumer surplus
The difference between what a consumer is willing to pay (as indicated by a demand curve) and the market price.
