Principles of Tax Analysis

Question 1

Statutory incidence

Answer 1

the legal burden of a tax

Question 2

Economic incidence

Answer 2

the study of who really bears the burden of a tax (consumers or producers)

Question 3

Tax shifting

Answer 3

price changes between statutory and economic incidence.

Question 4

*Short run incidence often differs from long run incidence. Other factors effecting tax incidence are the time horizon and open verses closed economy issues.

Answer 4

.*Short run incidence often differs from long run incidence. Other factors effecting tax incidence are the time horizon and open verses closed economy issues.

Question 5

Balanced budget incidence

Answer 5

when we examine the burden of a tax and the expenditure that the tax revenue funds.

Question 6

Differential incidence

Answer 6

examines how burdens differ when one tax is substituted for another.

Question 7

Lump-sum tax

Answer 7

tax that can not be avoided by changing behavior. Often used as a reference point.

Question 8

Partial equilibrium tax incidence

Answer 8

use to determine who bears a tax levied in a particular market

Question 9

When do we use Partial incidence

Answer 9

Appropriate when we think the effects of the tax will be confined to that market.

Question 10

Sources and Uses

Answer 10

Taxes affect the distribution of income through both.

Question 11

*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.

Answer 11

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.

Question 12

**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).

Answer 12

**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).

Question 13

Tax Wedge

Answer 13

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.

Question 14

Property Tax

Answer 14

The incidence of a tax on land

Question 15

Tax Capitalization

Answer 15

When the price of an asset falls to fully reflect the value of future tax payments

Question 16

General equilibrium incidence

Answer 16

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.

Question 17

**The Harberger model is a useful general equilibrium model of tax incidence in the two-good, two-factor case.

Answer 17

**The Harberger model is a useful general equilibrium model of tax incidence in the two-good, two-factor case.

Question 18

Distortionary tax

Answer 18

Any tax that changes relative prices, and therefore generates substitution effects. Example: a tax on a commodity.

Question 19

Horizontal equity

Answer 19

A principle of taxation under which people in similar circumstances should pay similar amounts of tax; “equal treatment of equals.”

Question 20

Vertical equity

Answer 20

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.

Question 21

Effective tax rate

Answer 21

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.

Question 22

Progressive tax

Answer 22

A tax under which the effective tax rate (the proportion of income that gets paid in taxes) rises as income rises.

Question 23

Regressive tax

Answer 23

A tax under which the proportion of income paid in taxes falls as income increases.

Question 24

Tax incidence

Answer 24

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.

Question 25

Unit tax

Answer 25

An excise tax under which the tax rate is expressed as an amount of tax per unit purchased. (Example: cigarette and liquor tax).

Question 26

Ad valorem tax

Answer 26

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.

Question 27

Excise tax

Answer 27

A tax levied on the purchases of a specific commodity.

Question 28

Partial equilibrium

Answer 28

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.

Question 29

General equilibrium

Answer 29

An economic analysis that considers interactions among several markets.

Question 30

Excess burden

Answer 30

A loss in welfare above and beyond tax revenues collected. Also referred to as dead weight loss or welfare cost of taxation.

Question 31

Consumer surplus

Answer 31

The difference between what a consumer is willing to pay (as indicated by a demand curve) and the market price.