TaxLecture1 - The Theory of Taxation Outline Tax Incidence...

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1 The Theory of Taxation: Outline Tax Incidence Application: the incidence of the corporate tax Optimal Commodity (Indirect) Taxation Optimal Income (Direct) Taxation Application: income transfer programs The choice between direct and indirect taxation Application: tax reform
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2 Tax Incidence Who bears the burden of a tax? Income taxes? Payroll taxes? Excise taxes? Corporate taxes?
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3 Tax Incidence: CBO Assumptions Who bears the burden of a tax? Income taxes? borne fully by the households that pay them Payroll taxes? borne fully by workers Excise taxes? borne fully by consumers Corporate taxes? borne fully by capital owners
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6 Tax Incidence: Current v. Lifetime How do you think these numbers would be affected if we measure tax burdens as fractions of lifetime income (as proxied by current consumption), rather than as fractions of current income?
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7 Tax Incidence Who bears the burden of a tax? Partial equilibrium analysis of a commodity tax is straightforward, but only considers one market in isolation General equilibrium analysis examines the effects of a tax across different markets
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The Three Rules of Tax Incidence The Statutory Burden of a Tax Does Not Describe Who Really Bears the Tax
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The Three Rules of Tax Incidence The Side of the Market on Which the Tax Is Imposed Is Irrelevant to the Distribution of the Tax Burdens
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The Three Rules of Tax Incidence Parties with Inelastic Supply or Demand Bear Taxes; Parties with Elastic Supply or Demand Avoid Them Perfectly Inelastic Demand
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The Three Rules of Tax Incidence Parties with Inelastic Supply or Demand Bear Taxes; Parties with Elastic Supply or Demand Avoid Them Perfectly Elastic Demand
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The Three Rules of Tax Incidence Parties with Inelastic Supply or Demand Bear Taxes; Parties with Elastic Supply or Demand Avoid Them Supply Elasticities
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Tax Incidence Extensions Tax Incidence in Factor Markets
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14 Example Suppose the demand and supply functions for MP3 players are: Q D = 1000 – 2P Q S = 500 + 3P Find the equilibrium price and quantity
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15 Solution Set Q D = Q S ; i.e.
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