Section 9 Flashcards
Why do we have deadweight loss
Due to the fact people respond to incentives
- some buyers will no longer by the project due to price increase
- some sellers will be at the market because it is no longer beneficial
- no tax revenue will occur for these instances
What determines the size of deadweight loss
Price elasticity of demand or supply
Elastic responds Substantially to a change in price which would mean a larger deadweight loss due to incentives to change their behavior
What does in inelastic demand or supply mean for dead weight loss
That the responsible only be a slight change due to the price increase there for a smaller deadweight loss
How do you evaluate a tax policy
using two objectives
- Equity
- Efficiency
What is the primary aim for a tax policy
Raise revenue for the government dummy
What are the costs of taxes to taxpayers
- The tax came in itself
Two other costs
- Deadweight losses
- Administrative burden
How are dead weight losses a cost to taxpayers
It distorts decisions people make
- reduces economic well-being
- in efficiency
- people work less
- The deadweight loss comes from the person who doesn’t pay the tax
What is the administrative burden
- The text care Bears this as they comply with tax laws
- it’s a type of deadweight loss
- created by filling out forms, recordkeeping etc.
How is it administrative burden a deadweight loss
Because only the government receives taxes paid that’s why there is a loss on this because people spend to adhere to rules
With an efficient text system what kind deadweight loss would you have and administrative burden
You would have a small deadweight loss and a small administrative burden
What is the consumption tax
Tax on what people spend their money on rather then the amount they earned
What is good about a consumption tax
Encourages people to Save
What are the consumption taxes
GST
And PST
What is the formula for income with regards to a consumption tax
Income = consumption plus savings
What is the formula for individual consumption with regards to consumption tax
Individuals consumption
Consumption = income minus savings
RRSPs function like what
A consumption tax
What is the formula for the average tax rate
Total taxes paid / total income
What is the marginal tax rate
Extra taxes paid on additional dollar of income
What does marginal tax measure
It measures how much a tax system discourages people from working
What causes the deadweight loss of income tax
The marginal tax
Which form of taxes most efficient
Lump sum tax
Everyone knows how much they will pay
Therefore there’s a minimal administrative burden
What is text incidence
Study of who bears the burden of taxes
What is tax incidence important for
Evaluating equity
The person who bears the burden is not always the person he gets the tax bill
Taxes alter the supply and demand equilibrium prices
Therefore you must consider this when evaluating horizontal and vertical equity
What is the flapper theory
The burden of attacks like a fly on the flapper stick wherever it first lands
This assumption is rarely valid
