week6 - X. TAXES: TAX INCIDENCE A. Role of taxes. 1. Raise...

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1 X. TAXES: TAX INCIDENCE A. Role of taxes. 1. Raise money to finance government spending. 2. Redistribute income. 3. Change incentives and affect behavior. B. Overview of tax incidence. 1. Statutory incidence: who is legally responsible for paying tax. 2. Economic incidence: who actually pays tax; i.e., the change in the real private distribution of income due to the tax. 3. Only people can pay taxes, but other entities may face statutory incidence (e.g., corporations). a. Politically popular or convenient to tax factors of production or other entities. b. Makes determination of economic incidence difficult (who pays corporate income tax?) 4. Distinction between sources and uses of income. a. A tax on a commodity can affect producers (and workers) (source) as well as consumers (use). b. A tax on an input can affect consumers (use) as well as producers (source) 5. Tax incidence determined by how prices respond to tax a. Relative elasticities of supply and demand are key. b. Effect may change over time – focus on short- and long-run effect of taxes. (Gasoline) C. Progressiveness of taxes.
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2 1. How do tax payments as share of income change with income? a. Proportional: tax as a share of income is constant regardless of income level. b. Progressive: tax as a share of income decreases with income. c. Regressive: tax as a share of income increases with income. 2. How define progressivity of taxes is not simple. a. Must look at average rates, not marginal: distinction between progressive taxes and graduated tax rates (graduated rates may be progressive, but not all progressive taxes are graduated.) b. Alternative measures of progressiveness. 1) Measure 1 looks at change in average tax rates as income increases: T 1 /I 1 – T 0 /I 0 V 1 = --------------- I 1 – I 0 2) Measure 2 looks at elasticity of tax revenue to income: (T 1 – T 0 ) (I 1 – I 0 ) V 2 = ----------- ÷ ---------- T 0 I 0 3) Both valid measure, but give different answers. C. Partial equilibrium models of tax incidence 1. Unit tax on consumers of good. a) Shifts demand curve to left: at each price, willing to buy less of good, since portion of price now goes to tax collector. b) Distinguish between price paid by consumers and received by producers; difference is
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week6 - X. TAXES: TAX INCIDENCE A. Role of taxes. 1. Raise...

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