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Falls partly on buyers and partly on sellers if price

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falls partly on buyers and partly on sellers If price paid by buyers doesn’t change at all, then the burden of the tax falls entirely on sellers Tax on sellers is like an increase in cost, so it decreases supply Tax on buyers lowers the amount they are willing to pay sellers, so it decreases demand and shifts the demand curve leftward Buyers respond to price that includes tax and sellers respond to price that excludes tax The market for labor, not Congress, decides how the burden of the Social Security tax is divided between firms and workers Perfectly inelastic demand – buyers pay Perfectly elastic demand – sellers pay The more inelastic the demand, the larger is the amount of the tax paid by buyers Perfectly inelastic supply – sellers pay Perfectly elastic supply – buyers pay When supply is perfectly inelastic, sellers pay the entire tax, and when supply is perfectly elastic, buyers pay the entire tax Usually, supply is neither perfectly inelastic nor perfectly elastic and tax is split between buyers and sellers The more elastic the supply, the larger is the amount of the tax paid by buyers The price buyers pay is the buyers’ willingness to pay, which measures marginal social benefit The price sellers receive is the sellers’ minimum supply-price, which equal marginal social cost A tax makes marginal social benefit exceed marginal social cost, shrinks the producer surplus and consumer surplus, and creates a deadweight loss With a tax, the sellers’ min supply-price rises by the amount of the tax and the supply curve shifts S + tax. Supply curve does not show marginal social cost Conclusion: Workers pay most of personal income taxes and most of SS taxes. B/C elasticities of demand for alcohol, tobacco, and gasoline are low and elasticities of supply are high, the burden of these taxes falls more heavily on buyers than on sellers. What are issues of taxes and fairness? The Benefits Principle: proposition that people should pay taxes equal to the benefits they receive from the services provided by government
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