ECON Chapter 8

As the size of a tax rises, the deadweight loss

rises, and tax revenue first rises, then falls.

A decrease in the size of a tax is most likely to increase tax revenue in a market with

elastic demand and elastic supply.

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 marginal tax rate on labor income for many workers in the United States is almost

40 percent.

the effect of a tax

A tax on a good places a wedge between the price that buyers pay and the price the sellers receive . The Q of the good sold falls

The benefit that government receives from a tax is measured by

Tax Revenue

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.

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.

A tax affects

buyers, sellers, and the government.

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.

Deadweight loss is the

decline in total surplus that results from a tax.

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.

The Social Security tax is a tax on

labor

Ronald Reagan believed that reducing income tax rates would

raise economic well-being and perhaps even tax revenue.

A tax on a good

raises the price that buyers effectively pay and lowers the price that sellers effectively receive.

Laffer Curve

shows the relationship between the size of the tax and tax revenue

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.

Deadwieght loss

the fall in total surplus that results from a market distortion, such as a tax

the greater the elastics of supply and demand ,

the greater the deadweight loss of a tax