IBE316-18 - IBE 316 Economic Policy Stiglitz Economics of...

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IBE 316 Economic Policy Stiglitz: Economics of the Public Sector Chapter 18: Tax Incidence Keisuke OTSU Sophia University FLA Spring 2008 OTSU (Sophia University FLA) IBE 316 Spring 2008 1 / 16
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Announcement Make up o¢ ce hour Date: Wednesday 9th Time: 10:00-11:30 (irregular time), 3:15-4:45 Place: 10-541 OTSU (Sophia University FLA) IBE 316 Spring 2008 2 / 16
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Review A good tax system should be e¢ cient low cost °exible transparent fair The government should identify Pareto e¢ cient tax systems and choose among them using the social welfare function OTSU (Sophia University FLA) IBE 316 Spring 2008 3 / 16
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Overview Focus Questions What is meant by the incidence of tax? What determines who bears the burden of taxes? Why are some taxes that appear to be markedly di/erent really equivalent? Who bears the burden of taxation in the US? OTSU (Sophia University FLA) IBE 316 Spring 2008 4 / 16
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Overview Tax incidence: di/erence between the individual±s real income before and after the tax has been imposed what an individual pays as tax is not the true tax burden shift of wage and prices due to the tax also creates a burden shift backward: wages fall due to tax shift forward: prices rise due to tax Fairness: fairness depends on the incidence of the tax Transparency: preferable to impose taxes whose incidence is clear OTSU (Sophia University FLA) IBE 316 Spring 2008 5 / 16
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Tax Incidence in Competitive Markets Competitive Market Price adjusts such that supply of goods equals the demand for it Supply curve when price increases, ²rms increase the supply Demand curve when price increases, individuals decrease the demand It makes no di/erence whether the ²rm or consumer pays the tax OTSU (Sophia University FLA) IBE 316 Spring 2008 6 / 16
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Tax Incidence in Competitive Markets
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