Ec28 Quiz 3 - Chapter 19 (Tax Incidence)

Consumer Tax Burden Formula

(Post-Tax Price - Pre-Tax Price) + Per-Unit Tax Payments by Consumers

Producer Tax Burden Formula

(Pre-Tax Price - Post-Tax Price) + Per-Unit Tax Payments by Producers

Higher after-tax price has three effects on other goods:

1. Income Effect - Consumers have lower incomes and may therefore purchase fewer units of all goods. 2. Substitution Effect - Consumers may increase their consumption of G&S that are substitutes and are now relatively cheaper 3. Complenetary Effect - Consumers may reduce their consumption of G&S that are complements (i.e. valet parking & restaurant meals)

CBO & TPC Analysis Key Assumptions (4)

1. Income taxes - borne fully by the households that pay them 2. Payroll taxes - borne fully by workers, regardless of whether these taxes are paid by the workers or by the firm 3. Excise taxes - fully shifted to prices and so are borne by individuals in proportion to their consumption of the taxed item. 4. Corporate taxes - born 20% by workers and 80% by the owners of capital; the latter is in proportion to each individual's capital income.

Tax shifts in capital and labor

A tax that shifts capital or labor out of any one jurisdiction will raise the supply of capital or labor to other jurisdictions, lowering the return to capital or labor elsewhere.

General Equilibrium Tax Incidence

Analysis that considers the effects on related markets of a tax imposed on one market.

Partial Equilibrium Tax Incidence

Analysis that considers the impact of a tax on a market in isolation.

Tax Incidence

Assessing which party (consumers or producers) bears the true burden of a tax

The ______ of _____ in the long run arises from the ability of investors to choose whether to reinvest in a form.

Elasticity of capital supply If there is a tax on the good produced by the firm, and this tax is passed on to capital investors in the form a lower return, then they are less likely to reinvest in the company.

Today, the top quintile earns more than ___ of all the income earned in the United States, and pays more than ____ of the taxed paid (CBO).

Half; Two-Thirds

The analysis of tax incidence in factor market is ____ to that in goods markets. The only difference is that _______ of the factors are the firms and _____ of the factors are individuals.

Identical; consumers; producers

Oligopoly Markets

Markets in which firms have some market power in setting prices but not as much as a monopolist. Much less consensus on models for oligopolistic markets. Economists tend to assume that the same rules of tax incidence apply in these markets as well.

Monopoly Markets

Markets in which there is only one supplier of a good. * The three rules of tax incidence apply in monopoly markets as well. The side of the market on which the tax is imposed remains irrelevant - monopolists cannot exploit their market power to avoid rule of tax incidence. Because monopolists are price makers, not price takers, marginal revenue is not a price determined in the market but a price chosen by the monopolist. Monopolists face a trade-off as price makers: additional sales at a given price will increase revenue, but they will also force the monopolist to lower prices on all existing units to achieve equilibrium. Note that even though the monopolist sets the price, the demand curve still must be respected.

When labor and capital avoid the tax, its burden falls squarely on the ________. (restaurant example)

Owners of the land Factors that are always inelastically demanded or supplied in both the short and long run bear taxes in the long run.

Only _____ can bear a burden or pay a tax.

People - An industry, factory, or utility cannot bear or pay for taxes.

On a lifetime basis, taxes on college textbooks are _____ because they tax those who earn high incomes on a lifetime basis.

Progressive

Taxes on goods like alcohol, gasoline and tobacco can be highly _____ when relating taxes paid to consumption rather to current income.

Regressive, but less so

Balanced Budget Tax Incidence

Tax incidence analysis that accounts for both the tax and the benefits it brings. (We will typically ignore because spending is difficult to trace; however, in reality distribution of both payments and spending revenues should be accounted for). A complete picture of tax incidence considers not only who bears the tax but also who receives the benefit of the spending that is financed out of the tax revenues. It is often difficult, however, to trace the spending associated with a given tax increase. Thus, we typically ignore the spending side when we do tax incidence analysis.

First Rule of Tax Incidence (Most Important)

Tax laws do not accurately identify who actually bears the burden of the tax. (The economic incidence of any tax is the difference between the individual's available resources before and after the tax has been imposed. - Statutory Incidence, Economic Incidence, Tax Wedge)

The sum of consumer & producer burden

Tax wedge created by the tax (difference between what consumers pay and what producer receive net of tax)

Computed Average Tax Rates

Taxes paid relative to total income

Statutory Incidence

The burden of a tax borne by the party that sends the check to the government

Economic Incidence

The burden of taxation measured by the change in the resources available to any economic agent as a result of taxation.

Tax Wedge

The difference between what consumers pay and what producers receive (net of tax) from a transaction

After-Tax Price

The gross price minus the amount of the tax, if producers pay the tax, or plus the amount of the tax, if consumers pay the tax.

Current Tax Incidence

The incidence of a tax in relation to an individual's current resources

Lifetime Tax Incidence

The incidence of a tax in relation to an individual's lifetime resources

Third Rule of Tax Incidence

The incidence of taxation on producers and consumers is ultimately determined by the elasticities of supply and demand on how responsive the quantity supplied or demanded is to price. Parties with Inelastic S/D bear taxes; Parties with Elastic S/D avoid them.

Gross Price

The price in the market. The price paid by or received by the party not paying the tax to the government.

Second Rule of Tax Incidence

The side of the market on which the tax is imposed is irrelevant to the distribution of the tax burdens. The tax incidence is identical whether the tax is levied on producers or consumers.

The ______ quintile pays much more in payroll taxes than in income taxes, and this disparity has been growing over time. More than ____% of all households paid more in payroll taxes than in income taxes in 2011.

bottom 82%

Price increases were much ____ near state borders, because their demand is more _____.

lower; elastic

When there are barriers to reaching the competitive market equilibrium (i.e. minimum wage), the _______ on which the tax is levied can matter. Such rigidities are often not present in ____ markets; thus on whom the tax is levied may matter more in ___ than in ____ markets.

side of the market output; input; output

Average corporate tax rates are ____ relative to income and payroll tax rates. Average excise tax rates are ____ and have risen for the ____ of the income distribution while falling at the ___.

small; small; bottom; top (This is due to a much larger decline in consumption of taxed goods, such as cigarettes by higher income groups than by lower-income groups).

The second rule of tax incidence tells us that what matters for determining the burden of the Social Security Tax is __________ ( ______ ), not how the tax is distributed across demanders and producers.

the total size of the tax (the total tax wedge)

When we analyze tax incidence, we ignore...

we ignore changed in quantities and only focus on the changes in prices paid by consumers and suppliers (makes tax incidence analysis simpler)

Higher percentage of tax is passed through to increased prices when taxes are paid at the _____ level. Because ______ are more able to evade the tax (i.e. cheat the government).

wholesale; retailers The rules of tax incidence are complicated when there is differential tax evasion on different sides of the market.