Tax Incidence Flashcards
direct tax
tax on income and wealth
How are direct taxes paid to government?
directly and without intermediary
Can direct taxes be adjusted?
yes - adjust rate based on income
indirect tax
tax on the production and consumption of goods and services
Who bears the burden of indirect taxes?
shared by consumers and producers
How are indirect taxes paid to government?
through intermediaries such as producers
sales tax
tax placed on a good when it is sold as a final good to a consumer
Are sales taxes changing?
yes based on retail value of good
ad valorem tax
tax placed on every transaction in the production life of good
How is an ad valorem tax different to a sales tax?
charged to every transformative stage of produciton where good is exchanged and ownership changed
Do ad valorem taxes change?
yes based on retail value
What are the other names for per-unit tax?
specific tax excise tax
per-unit tax
tax where a fixed amount of money per good is charged
tariff
tax on imported goods, levied upon entry into a country
What are the other names for tariff?
custorms duty impost
Are tariffs changing?
no generally specific tax
Graph for ad valorem tax
Graph for per-unit tax
How do lump sum taxes affect the supply curve?
no effect
What is assumed when apply tariffs?
constant price of imported good
taxes —- the prices of goods and services
increase
taxes —- the output of goods and services
reduce
the size of the market for the good or service is —-
diminished
consumer surplus is —- as consumers pay a higher price
reduced
producer surplus is —- as producers after-tax revenue is —-
reduced reduced
government enjoys —- tax revenue
greater
tax incidence
relative measurement of the respective burden of a per-unit tax on the consumers and producers
What does deadweight welfare loss represent?
existence of inefficiency in the market
Where is consumer surplus found at equilibrium?
A + B + C + D
Where is producer surplus found at equilibrium?
E + F + G + H
Where is community surplus found at equilibrium?
A + B + C + D + E + F + G + H
What is not found at equilibrium?
tax revenue or deadweight welfare loss
How do you see per-unit tax on graph?
distance between two supply curves P1 - P2
Total tax revenue
(P1 - P2) x Q1
Where is tax revenue found on a graph?
B + C + E + F
Where is the tax that comes from consumers found on a graph?
B + C
Where is the tax that comes from producers found on a graph?
E + F
Where is consumer surplus after tax found on a graph?
A
Where is producer surplus found on a graph?
H
Where is deadweight welfare loss found on a graph?
D + G
deadweight welfare loss
value lost to society by the introduction of tax value lost rather than transferred to another agent within society cost of inefficiency in market
Where is the consumer’s share of deadweight welfare loss found on a graph?
D
Where is the producers’s share of deadweight welfare loss found on a graph?
G
Burden when PED greater than PES
greater on producers than consumers
Burden when PED less than PES
greater on consumers than producers
Burden when PED equals PES
burden equally shared between consumers
Effect of inelastic PED on tax revenue, deadweight welfare loss and efficiency
greater tax revenue relatively small DWL less inefficiency caused
Effect of elastic PED on tax revenue, DWL and efficiency
lower tax revenue relatively large DWL more inefficiency caused
burden when PED = undefined (perfectly elastic)
producers have entire burden
burden when PED = 0 (perfectly inelastic)
consumers have entire burden
burden when PES = undefined (perfectly elastic)
consumers have entire burden
burden when PES = 0 (perfectly inelastic)
producers have entire burden
What is the effect of per-unit taxation on demand curve?
no effect
What is the supply equation given specific tax, t?
Qs = m(P-t) + A
What is the supply equation given ad valorem tax of x percent (given as decimal)?
Qs = m(P-Px) + A
