Tax Incidence and Equity Flashcards
what is tax incidence
who bears the burden/cost of a tax
does not take into account benefits
what is the relevance of statutory burden of tax? and how is it different from economic incidence?
The side of the market on which the tax is imposed
(e.g. workers or firms for a payroll tax) is (generally)
irrelevant to the distribution of the tax burden
Statutory incidence: The burden of a tax borne by the
party that sends the check/wire to the government.
* Economic incidence: The burden of taxation measured
by the change in the resources available to any
economic agent as a result of taxation. includes tax payments paid and any price changes cause by tax
What are the 3 rules of tax incidence?
The statutory burden of a tax does not describe who
really bears the tax.
2. The side of the market on which the tax is imposed
(e.g. workers or firms for a payroll tax) is (generally)
irrelevant to the distribution of the tax burdens.
3. Parties with inelastic (i.e. does not respond to taxes)
supply or demand bear taxes; parties with elastic
supply or demand avoid them. Memory aid: if I am
inelastic, I am inflexible, I do not change my behavior
to avoid taxes and I am therefore stuck with the taxe
soda tax of 50 c per gallon is imposed on consumers - what is true
consumers bear the full burden of tax
if the tax were imposed on supermarkets, the consumers would not bear any tax burden
what determines economic incidence of taxation
by the elasticities of supply
and demand, that is, how responsive the quantity
supplied or demanded is to price change. f one side of the market is perfectly inelastic, then it
bears the full burden of the tax.
how broadly tax is applied - broader taxes are harder to avoid - so response is more inelastic
what does tax incidence assume
Tax incidence analysis assumes that prices and wages
can freely adjust
but minimum wage and other things stop that
partial equilibrium tax incidence:
Analysis that
considers the impact of a tax on a market in isolation
General equilibrium tax incidence:
Analysis that
considers the effects on related markets of a tax
imposed on one marke
what could spillover effects from tax on restaurant be after higher price?
ncome effect from lower real income.
2. Substitution effect toward goods that are substitutes
for restaurants, e.g. movies.
3. Complementary effect: Consumers may reduce their
consumption of goods or services that are
complements to restaurant meals, e.g. wine for BYOB
restaurants
What does CBO assume when analyzing tax incidence?
Income taxes are borne fully by households that pay
them.
2. Payroll taxes are borne fully by workers.
3. Excise taxes are fully shifted to prices and so are
borne by individuals in proportion to their
consumption of the taxed item.
4. Corporate taxes are borne 20% by workers and 80%
by owners of capital
