Taxes Flashcards
Excise Tax
Tax imposed on specific goods, such as gasoline or tobacco.
Per-unit tax, increases the cost of production and/or consumption of these goods.
Tax Incidence
Measure of who really pays for a tax.
Depends on the price elasticity of supply and demand.
Ex: Tax on hotel guests (on paper, tax is on consumer), however, less people will go to hotels with the tax, thus, hotel workers (producers) bear some of the burden
Deadweight Loss of Taxation
Reduction in economic welfare resulting from a tax
Representation of the lost gains from trade due to the tax
Impact of Tax on Supply and Demand Curves
Tax on sellers shifts supply curve upwards by the amount of tax
Tax on buyers shifts demand curve downward by same amount
Effect of Elasticity on Tax Incidence
Demand is more elastic, producers bear larger burden
Supply is more elastic, consumers bear larger burden
Relationship Between Tax Size and Tax Revenue
Increasing tax rate does not always increase tax revenue
Laffer Curve effect: extremely high taxes reduce quantity of transactions and, thus, revenue
Tax Fairness Principles
Benefits principle (those who benefit more from government services should pay more)
Ability-to-pay principle (those with a greater ability to pay should pay more)
Trade-off Between Tax Equity and Efficiency
More equitable tax system may not be the most efficient in terms of economic growth.
Policymakers tend to face a trade-off between equity and efficiency.
Progressive vs. Regressive Taxes
Progressive taxes: Take a larger percentage of income from high-income earners
Regressive taxes: Take a larger percentage of income from low income earners
