1
Cost of Taxation
Chapter 7-2
Taxation and Government
•
For government to operate, it must tax.
•
For the market to work, it needs the
government.
•
Tax rates depend on what goods and
services government provides.
How Much Should Government
Tax?
•
To answer this, we must know the costs and
benefits of taxation.
This preview has intentionally blurred sections.
Sign up to view the full version.
2
The Costs of Taxation
•
The costs of taxation include:
– The direct cost of the revenue paid to
government
– The loss of consumer and producer surplus
caused by the tax
– The cost of administering the tax codes.
The Costs of Taxation
•
A tax paid by the supplier shifts the supply
curve up by the amount of the tax.
The Costs of Taxation
•
When government raises taxes, there is a
loss of consumer and producer surplus that is
not gained by government.
•
This is known as
deadweight loss
.
3
The Costs of Taxation
•
Graphically the deadweight loss is shown on
a supply-demand curve as the welfare loss
triangle.
The Costs of Taxation
• The
welfare loss triangle
– a geometric
This preview has intentionally blurred sections.
Sign up to view the full version.
This is the end of the preview.
Sign up
to
access the rest of the document.
- Spring '10
- e
-
Click to edit the document details
