Chapter 7: Taxes <---need to study

In the United States, taxes tend to be regressive at what level(s)?

State and local

Incidence of the tax

(how the burden of the tax is divided between consumers and producers) does not depend on who officially pays the tax. The incidence of an excise tax doesn't depend on who the tax is officially levied on. Rather, it depends on the price elasticities of demand and of supply. The incidence of an excise tax depends on the price elasticities of supply and demand. If the price elasticity of demand is higher than the price elasticity of supply, the tax falls mainly on producers; if the price elasticity of supply is higher than the price elasticity of demand, the tax falls mainly on consumers. In the case of the $40 hotel tax: a $40 tax on hotel rooms is reflected in a $20 increase in the price paid by consumers and a $20 decrease in the price received by producers.

Administrative costs

(of a tax) the resources used (which is a cost) by government to collect the tax, and by taxpayers to pay it, over and above the amount of the tax, as well as to evade it. The total amount of inefficiency resulting from a tax is equal to the deadweight loss plus the administrative costs of the tax.

Among the types of taxes are:

1. income taxes, 2. payroll taxes, 3. sales taxes, 4. profits taxes, 5. property taxes, and 6.wealth taxes.

The Revenue from an Excise Tax

An excise tax generates revenue for the government but lowers total surplus. The loss in total surplus exceeds the tax revenue, resulting in a deadweight loss to society. This deadweight loss is represented by a triangle, the area of which equals the value of the transactions discouraged by the tax. The revenue from a $40 excise tax on hotel rooms is $200,000, equal to the tax rate, $40—the size of the wedge that the tax drives between the supply price and the demand price—multiplied by the number of rooms rented, 5,000. This is equal to the area of the shaded rectangle.

What happens to producer and consumer surplus when there is an excise tax

Before the tax, the equilibrium price and quantity are PE and QE, respectively. After an excise tax of T per unit is imposed, the price to consumers rises to PC and consumer surplus falls by the sum of the dark blue rectangle, labeled A, and the light blue triangle, labeled B. The tax also causes the price to producers to fall to PP; producer surplus falls by the sum of the dark red rectangle, labeled C, and the pink triangle, labeled F. The government receives revenue from the tax equal to Q(T) × T, which is given by the sum of the areas A and C. Areas B and F represent the losses to consumer and producer surplus that are not collected by the government as revenue. They are the deadweight loss to society of the tax.

In the United States, taxes tend to be progressive at what level(s)?

Federl

What would happen if the city levied a tax on consumers instead of producers?

If a hotel guest must pay a tax of $40 per night, then the price for a room paid by that guest must be reduced by $40 in order for the quantity of hotel rooms demanded post-tax to be the same as that demanded pre-tax. So the demand curve shifts downward, from D1 to D2, by the amount of the tax.

Deadweight Loss and Elasticities

The greater the elasticity of demand or supply, or both, the larger the deadweight loss from a tax. If either demand or supply is perfectly inelastic, there is no deadweight loss from a tax. Demand is elastic in panel (a) and inelastic in panel (b), but the supply curves are the same. Supply is elastic in panel (c) and inelastic in panel (d), but the demand curves are the same. The deadweight losses are larger in panels (a) and (c) than in panels (b) and (d) because the greater the price elasticity of demand or supply, the greater the tax-induced fall in the quantity transacted. In contrast, the lower the price elasticity of demand or supply, the smaller the tax-induced fall in the quantity transacted and the smaller the deadweight loss.

Excise tax

a tax on sales of a good or service. -consumers pay more - producers receive less an excise tax drives a wedge between the price paid by consumers and that received by producers, leading to a fall in the quantity transacted. It creates inefficiency by distorting incentives and creating missed opportunities. (the post-tax supply curve shifts up by the amount of the tax compared to the pre-tax supply curve.)

Payroll tax

a tax on the earnings an employer pays to an employee.

Income tax

a tax on the income of an individual or family.

Profits tax

a tax on the profits of a firm.

Sales tax

a tax on the value of goods sold.

Property tax

a tax on the value of property, such as the value of a home.

Wealth tax

a tax on the wealth of an individual.

Lump-sum tax

a tax that is the same for everyone, regardless of any actions people take. is efficient because it does not distort incentives, but it is generally considered unfair.

Proportional tax

a tax that is the same percentage of the tax base regardless of the taxpayer's income or wealth.

Progressive tax

a tax that takes a larger share of the income of high income taxpayers than of low-income taxpayers. A tax is progressive if higher-income people pay a higher percentage of their income in taxes than lower-income people Progressive taxes are often justified by the ability-to-pay principle. However, a highly progressive tax system significantly distorts incentives because it leads to a high marginal tax rate, the percentage of an increase in income that is taxed away, on high earners. The U.S. tax system is progressive overall, although it contains a mixture of progressive and regressive taxes.

Regressive tax

a tax that takes a smaller share of the income of high income taxpayers than of low-income taxpayers. A tax is regressive if higher-income people pay a lower percentage of their income in taxes than lower-income people.

An efficient tax

minimizes both the sum of the deadweight loss due to distorted incentives and the administrative costs of the tax. However, tax fairness, or tax equity, is also a goal of tax policy.

Tax systems are classified as being

proportional, progressive, or regressive.

Tax structure

specifies how a tax depends on the tax base; usually expressed in percentage terms.

Every tax consists of both a ______ ___________ and a ______ ___________.

tax base (which defines what is taxed) and a tax structure (which specifies how the tax depends on the tax base).

Tax rate

the amount of tax people are required to pay per unit of whatever is being taxed. (An excise tax generates tax revenue equal to the tax rate times the number of units of the good or service transacted but reduces consumer and producer surplus.) In general, doubling the excise tax rate on a good or service won't double the amount of revenue collected, because the tax increase will reduce the quantity of the good or service bought and sold. And the relationship between the level of the tax and the amount of revenue collected may not even be positive. Panel (a) shows the revenue raised by a tax rate of $20 per room, only half the tax rate in Figure 7-6. The tax revenue raised, equal to the area of the shaded rectangle, is $150,000. That is 75% of $200,000, the revenue raised by a $40 tax rate. Panel (b) shows that the revenue raised by a $60 tax rate is also $150,000. So raising the tax rate from $40 to $60 actually reduces tax revenue.

There are two important principles of tax fairness:

the benefits principle and the ability-to-pay principle.

Trade-off between equity and efficiency

the dynamic whereby a well-designed tax system can be made more efficient only by making it less fair, and vice versa. (in a well-designed tax system, there is a trade-off between equity and efficiency.)

Tax base

the measure or value, such as income or property value, that determines how much tax an individual pays.

Marginal tax rate

the percentage of an increase in income that is taxed away. Progressive taxes are often justified by the ability-to-pay principle. But strongly progressive taxes lead to high marginal tax rates, which create major incentive problems.

Benefits principle

the principle of tax fairness by which those who benefit from public spending should bear the burden of the tax that pays for that spending.

Ability-to-pay principle

the principle of tax fairness by which those with greater ability to pay a tax should pay more tax. The fairest taxes in terms of the ability-to-pay principle, however, distort incentives the most and perform badly on efficiency grounds.