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Chapter 14 – Taxation and income distributionTaxation has 3 effects: - transfer of money from taxpayer to government - inefficient allocation of resources > because tax changes relative prices > loss to taxpayer, gain to no-one - transaction costs > cost of tax administration > compliance cost to taxpayer Statutory incidence:who is legally responsible for paying the tax Economic incidence:who bears the burden Tax shifting:the difference between statutory incidence and economic incidence functional distribution of income:the way income is distributed among people when they are classified according to the inputs they supply to the production process (e.g.: landlords, capitalists) size distribution of income:the way that total income is distributed across income classes lump sum tax:a tax whose value is independent of the individuals’ behavior tax wedge:the tax-induced difference between the price paid by consumers and the price received by producers different types of analysis: - balanced-budget incidence: combined effects of taxation and spending financed by those taxes - differential tax incidence: who bears the burden if we use this tax instead of that Progressive tax:the rich pay more - different definitions > Averagetax rate increases with income !rich pay more tax as % of their income > Marginaltax rate increases with income !rich also pay more tax on last euro earned Partial Equilibrium model: - one market Verspreiden niet toegestaan | Gedownload door Sitwat Hashmi ([email protected])lOMoARcPSD
- effects on other market are negligible - use if market is small compared to rest of economy unit tax:fixed amount (e.g. €5) per unit of a commodity ad valorem tax:percentage (e.g. 17%) of commodity price When something is taxed !Priceconsumers > Priceproducers Tax on profits Economic profit:return in excess of opportunity costs of factors of production used - under competition: economic profit exists only in short run - competition reduces economic profit to zero Profit maximization: MR = MC - neither MC nor MR are affected by profit tax !output and price remain the same !profit tax is fully born by the firm’s owners Partial Equilibrium model General Equilibrium model one market, effects on other markets are negligible 2 sectors (M, F), takes into account how various markets are interrelated use if market is small compared to rest of economy use if market is large incidence is independent statutory incidence; moving S or D gives same result incidence depends on supply and demand elasticities; - supply perfectly elastic: consumers bear entire burden - demandperfectly elastic: producers bear entire burden 9 possible ad valorem taxes: - capital tax for either M of F - labor tax for either M or F - consumption tax on either good M or F - tax on either labor or capital - general income tax (Tax on F & M = tax on income = tax on consumption)NB: nothing about the incidence of a tax can be known without information on the relevant behavioral elasticities capitalization: