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