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Micro: Chapter 7
Test 2
| Term | Definition |
|---|---|
| excise tax | a tax charged on each unit of a good or service that is sold; based on quantity consumed; can tax the seller or the buyer, but they both end up paying |
| If you tax the seller... | after seller gets price P, they must forfeit tax portion T; so for every unity sold, seller now gets (P-T); to sell, seller needs (P-T>cost); results in upward shift of supply, so at any given P they will supply less |
| If you tax the seller... (cont) | New price of P2 -> this is what buyer sees; seller price is P2-T (Pp); seller price goes down bc they need to subtract tax from price consumer pays; buyer price goes up, seller price goes down, equilibrium quantity is reduced; both feel worse off |
| If you tax the buyer... | even though price tag is only P, buyers will pay additional T on top of that, buyer really pays (P+T); shift down of demand curve because WTP > P+T (buyers are getting T less value when they buy one unit; |
| If you tax the buyer... (cont) | Seller has lower price than equilibrium, buyer feels higher than equilibrium (P+T); consumer feels like they're paying a higher price than seller is getting; even though you're "Just taxing the buyers," sellers have lower price too and are also effected |
| Ergo... | it doesn't matter who you tax, the equilibrium outcome is the same |
| incidence | buyers always pay Tc and sellers pay Tp, where T=Tc+Tp; the split of tax is determined by elasticity; less elastic = greater share of tax; more elastic = lesser share of tax |
| Why does more elastic pay less / less elastic pay more? | More elastic means more sensitive to prices, therefore, more willing to walk away; less elastic means that less sensitive to price; the side less responsive to price will change their behavior less and thus bear more of the incidence |
| Elastic supply, inelastic demand | Pp is almost exactly the same value as original price (buyers) and Pc has gone up a lot (sellers), so tax share Tc>Tp; consumers (ie demand) bears more of tax b less elastic |
| Inelastic supply, elastic demand | Pc has barely gone up, almost the same as original (consumers) and Pp has dropped far below P; so tax share Tp>Tc; producers (ie supply bears brunt of the tax) |
| moral of incidence and elasticity | EoD<EoS = larger share on demand (buyers); EoD>EoS = larger share on supply (sellers); so basically LESS ELASTIC = HIGHER INCIDENCE |
| benefits of taxation | revenue, adjust behavior (taxing cigs) |
| revenue | (Pc-Pp) * Q; whether or not raising T will result in more revenue depends on elasticity; more elastic = lower revenue when raising T; less elastic = higher revenue when raising T; revenue created from lost producer/consumer surplus; reallocationof surplus |
| DWL | triangle that forms due to shift in equilibrium; if we want to minimize DWL, we should tax the goods that are least sensitive to price changes; more inelastic markets generate less DWL, but equity issues bc inelastic markets = necessities |
| Will raising taxes always increase revenue? | No! Depends on current tax level and elasticities of supply and demand |
| tax base | the measure or value that determines the tax; ex: income, property value |
| tax structure | how, based on base, the tax gets calculated; ex: income over $50,000 (base) is taxed at 7% (structure) |
| income tax | tax on a family's income from wages and investments |
| payroll tax | tax that depends on earnings an employer pays to an employee |
| sales tax | tax on the value of goods sold |
| profits tax | tax on the value of property, such as the value of a house |
| wealth tax | tax on an individual weath |
| proportional tax | flat tax; no matter the value of the base, % you pay is the same; 5% tax for everybody; ex: sales tax |
| progressive tax | the greater the amount of the base, the more % you pay; high-income pays a larger percent than lower income; ex: income tax |
| regressive tax | the greater the amount of the base, the lower % you pay; higher-income taxpayers pay a lower percentage than lower incomes; ex: Social Security tax |
| benefits principle | people that benefit pay the tax; if you use it, you pay; seems fair that people you use it are the ones who pay, but tough to have different taxes for different goods and can be unfair -> just because you use roads doesn't mean you can afford to fix them |
| ability-to-pay principle | those who are more able to pay the tax share a larger burden of the tax; funding sponsored through public education taxes; means that people w/higher income pay a higher percentage of taxes |
| lump-sum taxes | a tax that is the same regardless of any actions people take; bc they're independent of quantity they are more efficient and avoid DWL; but viewed as unfair bc don't adjust based on consumption; efficient but not equitable |
| arguments for and against progressive income tax | for: fairness (people who make more have more ability to pay); against: potentially distorting (each dollar you earn, you get to keep less of, so less incentive to earn more money?) |
| mean tax | the average tax rate paid on all income |
| marginal tax rate | the tax rate paid on the next dollar earned; system that the US has for income taxes; it's basically like a stepping stone of rates based on income brackets; you pay the rate within each bracket that you qualify for; the MTR is what bracket you fit in |
Created by:
nicook
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