Review 5 Economics of Taxation Flashcards
Tax incidence
The way the burden of a tax is distributed among economic units (consumers, producers, employees, employers, and so on). The actual tax burden does not always fall on those who are statutorily assigned to pay the tax.
Tax base
The level or quantity of an economic activity that is taxed. Higher tax rates reduce the level of the tax base because they make the activity less attractive.
Tax rate
The per-unit amount of the tax or the percentage rate at which the economic activity is taxed.
Deadweight loss
The loss of gains from trade to buyers and sellers that occurs when a tax is imposed. The deadweight loss imposes a burden on both buyers and sellers over and above the actual payment of the tax.
Excess burden of taxation
Another term for deadweight loss. It reflects losses that occur when beneficial activities are forgone because they are taxed.
Subsidy
A payment the government makes to either the buyer or the seller, usually on a per-unit basis, when a good or service is purchased or sold.
Whichever is more ________________ (elastic or inelastic) among supply and demand will bear a larger share of the tax burden.
inelastic
How do price elasticities affect the deadweight loss of a tax?
The more inelastic at least one of the curves is (supply or demand), the smaller the deadweight loss.
How do price elasticities affect the amount of tax revenue?
The more inelastic at least one the curves is (supply or demand), the larger the tax revenue
If there is no tax on the sale of widgets, the price of widgets is $13 and there are 90 widgets sold weekly. When the government imposes a $3 per widget tax on the sale of widgets sales dropped to 70 widgets per week. How much revenue, per week, did the government collect from this tax?
70x3= $210
If there is no tax on the sale of widgets, the price of widgets is $13 and there are 90 widgets sold weekly. When the government imposes a $3 per widget tax on the sale of widgets, the buyer’s price of widgets increased to $15 and sales dropped to 70 widgets per week. What was the buyers’ tax burden from this tax?
(15-13)70=$140
If there is no tax on the sale of widgets, the price of widgets is $13 and there are 90 widgets sold weekly. When the government imposes a $3 per widget tax on the sale of widgets, the buyers’ price of widgets increased to $15 and sales dropped to 70 widgets per week. What is the sellers’ tax burden from this tax?
buyer’s payed $2 more per unit leaving $1 more per unit for seller.
1x70-=$70
If there is no tax on the sale of widgets, the price of widgets is $13 and there are 90 widgets sold weekly. When the government imposes a $3 per widget tax on the sale of widgets, the buyers’ price of widgets increased to $15 and sales dropped to 70 widgets per week. What is the deadweight loss of this tax?
1/2(90-70)(3)=$30
Is the buyers’ price higher when the state imposes a tax when the demand for widgets is elastic or inelastic?
inelastic
Is the buyers’ price higher when the state imposes a tax when the supply for widgets is elastic or inelastic?
elastic
Is the sellers’ price higher when the state imposes a tax when the demand for widgets is elastic or inelastic?
elastic
Is the sellers’ price higher when the state imposes a tax when the supply for widgets is elastic or inelastic?
inelastic
When the state impose a tax on widgets, would more widgets be sold if the demand was elastic or inelastic?
inelastic
When the state impose a tax on widgets, would more widgets be sold if the supply was elastic or inelastic?
inelastic
When the state imposes a tax on widgets, will it generate more revenue if demand is elastic or inelastic?
inelastic
When the state imposes a tax on widgets, will it generate more revenue if supply is elastic or inelastic?
inelastic
When the state imposes a tax on widgets, will the buyers pay a greater share of the tax burden if demand is elastic or inelastic?
inelastic
When the state imposes a tax on widgets, will the buyers pay a greater share of the tax burden if supply is elastic or inelastic?
elastic
Progressive tax
a tax in which the average tax rate rises with income. People with higher incomes will pay a higher percentage of their income in taxes.
Proportional tax
a tax in which the average tax rate is the same at all income levels.
Regressive tax
A tax in which the average tax rate falls with income. People with higher incomes will pay a lower percentage of their income in taxes.
Which US tax is progressive?
Personal income tax
Which US tax is regressive?
Payroll taxes
Average tax rate
Tax liability divided by taxable income. It is the percentage of income paid in tax.
Marginal tax rate
The additional tax liability a person faces divided by their additional taxable income. It is the percentage of an extra dollar of income earned that must be paid in taxes. It is the marginal tax rate that is relevant in personal decision making.
Laffer Curve
A curve illustrating the relationship between the tax rate and tax revenue. Tax revenues will be low at both very high and very low tax rates. When tax rates are quite high, lowering them can increase tax revenue.
Equation for tax revenue
Tax base x tax rate
What are the primary forms of tax revenue for the federal government?
Personal income tax (greatest)
Payroll tax (2/3 of PIT)
Corporate Income Tax (much less than other two)
A tax is more efficient if what is small?
Deadweight loss
Given a table of quantity, buyer’s price, and seller’s price, what do you do to find the new equilibrium price when a tax is imposed on the sellers?
Add the amount of the tax to the seller’s price at all quantities. Find out where the buyers’ price and sellers’ price now intersect. This is the equilibrium price.
Tax shifting
Aa kind of economic phenomenon in which the taxpayer transfers the tax burden to the purchaser or supplier by increasing the sales price or depressing the purchase price during the process of commodity exchange.
