Principles of Economics- Mankiw (5th) 127

Principles of Economics- Mankiw (5th) 127 - CHAPTER 6 S U P...

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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 131 CASE STUDY CAN CONGRESS DISTRIBUTE THE BURDEN OF A PAYROLL TAX? If you have ever received a paycheck, you probably noticed that taxes were de- ducted from the amount you earned. One of these taxes is called FICA, an 100 to 90 cones. Once again, the tax reduces the size of the ice-cream market. And once again, buyers and sellers share the burden of the tax. Because the market price rises, buyers pay $0.30 more for each cone than they did before the tax was enacted. Sellers receive a higher price than they did without the tax, but the effec- tive price (after paying the tax) falls from $3.00 to $2.80. Comparing Figures 6-6 and 6-7 leads to a surprising conclusion: Taxes on buy- ers and taxes on sellers are equivalent. In both cases, the tax places a wedge between the price that buyers pay and the price that sellers receive. The wedge between the buyers’ price and the sellers’ price is the same, regardless of whether the tax is levied on buyers or sellers. In either case, the wedge shifts the relative position of
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