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IBE 316 Economic PolicyStiglitz: Economics of the Public SectorChapter 18: Tax IncidenceKeisuke OTSUSophia University FLASpring 2008OTSU(Sophia University FLA)IBE 316Spring 20081 / 16
AnnouncementMake up o¢ ce hourDate: Wednesday 9thTime: 10:00-11:30 (irregular time), 3:15-4:45Place: 10-541OTSU(Sophia University FLA)IBE 316Spring 20082 / 16
ReviewA good tax system should bee¢ cientlow cost°exibletransparentfairThe government should identify Pareto e¢ cient tax systems andchoose among them using the social welfare functionOTSU(Sophia University FLA)IBE 316Spring 20083 / 16
OverviewFocus QuestionsWhat 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 reallyequivalent?Who bears the burden of taxation in the US?OTSU(Sophia University FLA)IBE 316Spring 20084 / 16
OverviewTax incidence: di/erence between the individual±s real income beforeand after the tax has been imposedwhat an individual pays as tax is not the true tax burdenshift of wage and prices due to the tax also creates a burdenshift backward: wages fall due to taxshift forward: prices rise due to taxFairness: fairness depends on the incidence of the taxTransparency: preferable to impose taxes whose incidence is clearOTSU(Sophia University FLA)IBE 316Spring 20085 / 16
Tax Incidence in Competitive MarketsCompetitive MarketPrice adjusts such that supply of goods equals the demand for itSupply curvewhen price increases, ²rms increase the supplyDemand curvewhen price increases, individuals decrease the demandIt makes no di/erence whether the ²rm or consumer pays the taxOTSU(Sophia University FLA)IBE 316Spring 20086 / 16