Chapter 8-Taxes

Which of the following does a tax rate refer to?

A percentage of income

Taxes and Efficiency

A tax places a wedge between the buyers' price (marginal benefit) and the sellers' price (marginal cost). The equilibrium quantity is not efficient and a deadweight loss arises.

The Effects of the Income Tax

Firms can substitute machines for labor, so the demand for labor is heavily effected by wages. Most people must work for their income, so the supply of labor is not as responsive to wage changes.

Incidence, Inefficiency, and Elasticity of Demand

Perfectly Inelastic Demand: Buyer Pays and Efficient Perfectly Elastic Demand: Seller Pays and Inefficient

Which of the following is the marginal tax rate?

The fraction of each additional dollar of income that must be paid in taxes.

Incidence, Inefficiency, and Elasticity

The incidence of a tax depend on how responsive the Supplier or Demander is to a change in the price. The group that is the most unresponsive (inelastic) towards a price change will end up paying the majority of the tax.

If the last dollar of income earned by individuals with the highest incomes is taxed at a rate that is less than the average tax rate, which of the following is correct?

The income tax is a regressive income tax.

Which of the following tax rates is a better indicator of people's willingness to work, save, and invest?

The marginal tax rate

How is the U.S. federal income tax structured?

The rate at which income is taxed increases as income increases.

Which of the following is the average tax rate?

The total tax paid divided by total income

Since the demand for labor is elastic a tax on labor will result in

a deadweight loss

The proposition that people should pay taxes equivalent to the value of the benefits they receive from public sources is called the

benefits principle This type of system would be fair since the people who consume the most would also pay the most. However, it is very difficult to measure the consumption of public goods.

The deadweight loss that arises from the imposition of a tax is known as the

excess burden Taxes create inefficiencies because consumer surplus and producer surplus both shrink. Part of each surplus goes to the government in the form of tax revenue and the remainder becomes the deadweight loss. Tax incidence refers to how the buyer and the seller split the tax burden. Government revenues are the amount remitted to the government resulting from imposing the tax.

When the demand for a good is perfectly inelastic the imposition of a tax will be efficient since it will

generate no deadweight loss A tax will typically reduce the quantity of a good sold and result in lower consumer and producer surplus. Part of that lower surplus goes to the government in the form of tax revenues and part of it is simply deadweight loss to the economy. However, if demand is perfectly elastic the number of units sold will remain the same. The consumer will bear 100% of the tax burden and there will be no deadweight loss. The good's price will rise by the amount of the per unit tax.

When the economy is at full employment, a cut in household taxes will

increase consumption

Concerned about the political fallout from rising gas​ prices, suppose that the U.S. government imposes a price ceiling of​ $3.00 a gallon on gasoline. This price ceiling creates lines at the pumps when the price ceiling

is less than the equilibrium price

Tax incidence

is the division of the burden of a tax between the buyer and the seller. When a good is taxed, buyers and sellers respond differently. •Buyers respond to the price that includes the tax. Sellers respond to the price that excludes the tax

When the supply of a good is perfectly inelastic, or unrelated to the product's price, and the seller pays 100% of the tax it will result in

no deadweight loss

Tax incidence is affected by the

price elasticity of demand and supply for a product

The federal income tax in the United States is a

progressive tax

A tax is efficient if it imposes a __________ relative to the tax revenue it raises.

small excess burden

When the elasticity of demand for a product is __________ the elasticity of supply, consumers pay __________ of the tax on the product.

smaller than, the majority When the elasticity coefficient is small (i.e., less than 1) that means the product is inelastic, which means that consumers will be more likely to buy the product regardless of price. Therefore, if the demand side is not overly sensitive to price changes and the suppliers are sensitive to price changes then the tax incidence will fall more heavily on the consumer.

The amount of a person's tax liability depends on their:

taxable income

A tax on consumption will not decrease consumption as much as expected if the tax is

temporary

Tax incidence refers to

the actual division of the tax between buyers and sellers in a market Deadweight loss and excess burden are related to the efficiency of a tax. A tax is efficient if it imposes a small excess burden relative to the tax revenue it raises. The excess burden is a measure of efficiency loss to the economy due to a reduction in quantity produced due to the imposition of a tax. This loss is also known as deadweight loss. The most efficient taxes minimize the amount of excess burden relative to the revenue raised.

When a product's demand is perfectly inelastic the imposition of a tax will result in the tax being borne by

the buyer If the demand is perfectly in elastic the buyer will buy the same number of units before and after the tax. In this case the seller can pass the entire tax along to the buyer. Medications, such as insulin, would be the closest example of this type of demand we see in the real world.

If a tax system is proportional you will pay

the same average tax rate at every income level

If the demand for a good or service is perfectly elastic the tax will be borne by

the seller

The most likely solution to the current underfunding of the Social Security systems is

to increase the Social Security tax The current system is not sustainable in the long run. In order to restore it to long run viability the government can opt to increase taxes, reduce benefits, or increase retirement age. The most politically palatable action according to the text is to increase the Social Security tax.

When a tax is applied to a good or service the quantity of units sold will

typically fall

When a minimum wage is set above the equilibrium wage​ rate

unemployment increases as the company is not willing to employ the same amount of employees at a higher rate