Effect of exise taxes on Markets Final.docx - Effect of Excise Taxes on Markets 1 Effect of Excise Taxes on Markets Jonathan C Mendez Amici

Effect of exise taxes on Markets Final.docx - Effect of...

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Effect of Excise Taxes on Markets 1Effect of Excise Taxes on MarketsJonathan C. Mendez AmiciMicroeconomics, ECON 210Professor Dr. E. M. EkanayakeJanuary 18, 2017
Effect of Excise Taxes on Markets 2AbstractThe first part of this paper will introduce us to taxes, and when they were first levied in history. After a brief review of ancient taxes, we will focus on taxes on the US, from the first excise tax recorded in America after the independence, to what items are subjected to excise taxes nowadays. The following part will analyze if tobacco and alcohol—which will be the focus for the rest of the paper—are elastic or inelastic. Then, after explaining the inelasticity of these products,I will address the effects of excise taxes in the supply and demand curves of these products.Next, we will see what are the effect on both the short and long run, and why are such effects present on the curves of these products. Basically, in the short run we will see the changesin the different Marginal Cost and Total Cost curves, while in the long run we will explain the behavior of firms.Finally, we end up with a conclusion regarding my personal opinion on such taxes, as well as looking at an example of how applying such taxes in the wrong way can bring results opposite of what we expect.
Effect of Excise Taxes on Markets 3History of Excise TaxesThe first recordings of excise taxes date back to ancient Egypt, where Pharaohs charged atax on cooking oil. Other examples of early taxes are those levied by Greeks, whom charged a war tax that was abolished during peace times, as well as a residence tax for those who weren’t direct descendants of Athenians. The Roman Empire charged a variety of taxes, which were also put into practice during the Roman occupation of Great Britain. (Adams, 1993)The first recording of an excise tax in the United States of America is that known as the Whisky Tax, imposed by Alexander Hamilton in 1791, which consisted of 25% on spirits, and led to a small revolt which required 13,000 soldiers to dissipate (USHistory.com, n.d.). Many other excise taxes have been applied and repelled over the years, but reviewing each one of them is beyond the scope of this paper.Today in the US excise taxes are applied to: fuels, heavy trucks and trailers, highway-typetires, alcohol, tobacco, firearms, tanning, etc. (IRS, 2008). The tax levied on each item varies, and can be Ad Valorem, literally “According to Value” in Latin, referring to a percentage based on the retail price of the item/service, or Specific, which means a specified amount based on the number of items instead of the final cost of such item. (Intestopedia, n.d.)But how the government selects which items to tax? Some of the items targeted by such tax are tobacco and alcohol; these objects of widespread disapproval are taxed based on the assumption that “most people—including many cigarette smokers and moderate drinkers—feel that there is something vaguely immoral about tobacco and alcohol”, with an ultimate goal of increasing government’s tax revenue and making the product more expensive, discouraging its consumption. (Sadowsky, n.d.)

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