Taxes Flashcards
Excise Tax
Tax on sales of good/service
—> 1. Raise price paid by buyers
2. Reduce price received by sellers
Incidence
Of a tax is measure of who really pays it
Tax revenue
Wedge between the demand price and supply price
Consumers pay tax mostly
- Price elasticity of Demand -> Low
- Price elasticity of Supply -> High
Producers pay tax mostly
- Price Elasticity of Demand -> High
- Price Elasticity of Supply -> Low
Elasticity determines
Incidence of an excise tax —> who really pays it
Tax revenue =
Height x Width
Tax amount x Quantity
Tax rate
Amount of tax people are required to pay per unit of taxed good / service
Cost of Collecting Taxes
- Administrative costs - resources used by government to collect the tax and by taxpayers to pay it
- Total Inefficiency - DWL + Administrative Costs
DWL is smaller when
- Demand is inelastic
- Supply is inelastic
DWL is larger when
- Demand is elastic
- Supply is elastic
To minimize inefficiency of taxation
Only tax goods that have demand or supply or both inelastic
2 principles
- Benefits Principle - who benefit from public spending should pay the taxed price
- Ability-To-Pay Principle - who have greater ability to pay a tax should pay it
Lump-Sum Tax
Tax same for everyone, regardless of people’s actions
Tax Base
Measure / Value that determines how much tax an individual or firm pays
