ECO 101 Chapter 8
The Laffer curve relates
the tax rate to tax revenue raised by the tax
Taxes cause deadweight losses because taxes
-reduce the sum of producer and consumer surpluses by more than the amount of tax revenue -prevent buyers and sellers from realizing some of the gains from trade -cause marginal buyers and marginal sellers to leave the market, causing the quantity sold to fall
The marginal tax rate on labor income for many workers in the United States is almost
40 percent.
Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. Total surplus before the tax is measured by the area
I+J+K+L+M+Y.
Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The deadweight loss due to the tax is measured by the area
I+Y.
Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. Total surplus after the tax is measured by the area
J+K+L+M.
Which of the following events always would increase the size of the deadweight loss that arises from the tax on gasoline?
The amount of the tax per gallon of gasoline increases.
A tax affects
buyers, sellers, and the government
The demand for chicken wings is more elastic than the demand for razor blades. Suppose the government levies an equivalent tax on chicken wings and razor blades. The deadweight loss would be larger in the market for
chicken wings than in the market for razor blades because the quantity of chicken wings would fall by more than the quantity of razor blades.
To fully understand how taxes affect economic well-being, we must
compare the reduced welfare of buyers and sellers to the amount of revenue the government raises.
If the labor supply curve is very elastic, a tax on labor
has a large deadweight loss.
If the labor supply curve is nearly vertical, a tax on labor
has little impact on the amount of work that workers are willing to do.
The Social Security tax is a tax on
labor
The amount of deadweight loss from a tax depends upon the
price elasticity of demand, price elasticity of supply, and the amount of the tax per unit (all the above)
Ronald Reagan believed that reducing income tax rates would
raise economic well-being and perhaps even tax revenue.
A tax
raises the price buyers pay and lowers the price sellers effectively receive, and places a wedge between the price buyers pay and the price sellers receive.
As the size of a tax rises, the deadweight loss
rises, and tax revenue first rises, then falls.
Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by K+L represents
tax revenue.
The benefit that government receives from a tax is measured by
tax revenue.
A decrease in the size of a tax is most likely to increase tax revenue in a market with
elastic demand and elastic supply.
Supply-side economics is a term associated with the views of
Ronald Reagan and Arthur Laffer.
According to Arthur Laffer, the graph that represents the amount of tax revenue (measured on the vertical axis) as a function of the size of the tax (measured on the horizontal axis) looks like
an upside-down U.
Deadweight loss is the
decline in total surplus that results from a tax
Refer to Figure 8-2. The imposition of the tax causes the quantity sold to
decrease by 1 unit.
Other things equal, the deadweight loss of a tax
increases as the size of the tax increases, and the increase in the deadweight loss is more rapid than the increase in the size of the tax
A deadweight loss is a consequence of a tax on a good because the tax
induces buyers to consume less, and sellers to produce less.
Refer to Figure 8-14. Which of the following combinations will minimize the deadweight loss from a tax?
supply 1 and demand 1
The view held by Arthur Laffer and Ronald Reagan that cuts in tax rates would encourage people to increase the quantity of labor they supplied became known as
supply-side economics.
Economists disagree on whether labor taxes cause small or large deadweight losses. This disagreement arises primarily because economists hold different views about
the elasticity of labor supply.