4.4 The Economic Effect of Taxes
The term tax incidence refers to
A. the actual division of the burden of a tax between buyers and sellers in a market.
Refer to the graphs. In each of the graphs, a curve has shifted as a result of a new Social Security tax. In which graph do workers bear a larger burden from the tax?
In both cases, the burden on workers is the same.
Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain.
No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government.
According to a news story, Pennsylvania's liquor tax is "paid by the seller—the restaurant or bar owner—when the seller buys liquor from state-run wine and spirit stores." Source: Matt Assad, "How Booze Brings Heady Development," (Allentown, PA) Morning Call, February 22, 2015. The way in which liquor taxes in Pennsylvania are collected influences the price of a glass of wine purchased by a consumer in a restaurant by
decreasing supply and increasing the price of wine and other liquor drinks in stores.
According to economists, an efficient tax is one that
imposes a small excess burden relative to the tax revenue it raises.
As explained in the chapter, economic efficiency is an outcome in a market when the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production. Considering this explanation of economic efficiency, why does a tax creates deadweight loss (i.e. reduce surplus)? What is the impact of a production tax on the equilibrium price? The equilibrium price As a result, a tax on production reduces consumer surplus because __________ lose the _______________ of the ___________ quantity caused by the tax.
rises and the equilibrium quantity falls. consumers; marginal benefit minus marginal cost; decreased
Tax incidence indicates
the actual division of the burden of a tax.
Does it matter whether buyers or sellers are legally responsible for paying a tax?
No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax.