Lecture2c.ppt

Lecture2c.ppt - Lecture2:TaxIncidence...

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    Lecture 2:  Tax Incidence
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    Key Results from Last Lecture Who sends the check in does not matter Inelastic side of the market bears more of the tax
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    Outline for today’s lecture Sharing of burden within the firm Short-run vs. long-run incidence Incidence of the corporate income tax Other examples of tax incidence studies Basic message: Many complications in trying to judge who ends up “paying” a tax.
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    Sharing of Burden within the Firm Firms don’t bear taxes: people do Burden on firms is ultimately shared between: Domestic and foreign producers Land, labor, and capital
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    Domestic vs. Foreign Producers: Example with imports of foreign oil Last class we assumed an elastic supply curve of oil from abroad What if the foreign (net) supply curve is upward sloping? Now, a tax on imports leads to a fall in the price foreign firms receive for oil They sell less in the U.S. and more abroad Foreign consumers therefore benefit, while foreign producers lose. U.S. producers benefit, U.S. consumers lose
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    Formal analysis of international oil  market Market equilibrium requires total demand equal to total supply. Let the price on the world market be P , and the price in the U.S. be P+T, where T is the tariff rate. Market equilibrium requires U.S. imports equal foreign exports of oil: An increase in T leads to a fall in P. ) ( ) ( ) ( ) ( P D P S T P S T P D f f d d - = + - +
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    Capital vs. Labor vs. Land Domestic production requires various inputs Each input has outside options: Workers can get other jobs Capital can be invested in other sectors Only alternative use of land is pasture Again, the more inelastic the supply of a factor, the more of the burden is borne by this factor
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    How elastic are each of the factors? Oil workers are only a small part of the labor
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Lecture2c.ppt - Lecture2:TaxIncidence...

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