public final

ribbit! ribbit!

statutory incidence

legal obligation to pay a tax

economic incidence

who is effected by a rise in price caused by a tax being created

Equivalent variation

the equivalent change income for a household on a same indifference curve as a proposed tax

Showing Equivalent variation on the two goods model

the difference between the inital budget curve, and the parallel shift in the budget curve caused by income effect

DWL on the 2 good model for tax

DWL = EV - Tax rev

DWL for the 2 good subsidy model

DWL = Exp - EV

Subsidy expenditure on a 2 good graph

Difference between old budget line and the parallel shifted one

maximin criteria for social welfare

social welfare is defined as the lowest utility that any person has

additive criteria for social welfare

level of social welfare is the sum of utility for all people

bequest effect

savings are increased before retirement to leave an inheritance

retirement effect

savings are increased while working to retire earlier and live more comfortable

PAYG pention system

pay as you go, current workers savings are taxed and used to fund social security funding.

Sustainable tax level for PAYG

T = Nr/Nw * B/W

Tradeoff for delaying retirement

R falls, less years of life, but B increases as compensentory benefit rises

What are some taxes causing no DWL

Lump Sum, and pigouvian tax

Pigouvian tax

A tax on a good which aims to reduce a negative externality by decreasing consumption of a good.

Lump sum tax

all goods increase in price equally

ad valorem tax

Tax is applied as a percentage of the goods value

unit tax

tax is applied as a flat unit amount per good

Statutory incidence

Legal responcbility to pay a tax, set by govt.

Economic incidence

who faces the economic burden of tax, caused by changing prices

what does a parties economic incidence of tax depend on

elasticity of prices, the more inelastic side has a higher incidence

Proportional tax system

Tax burden stays the same proportion to Y,

Regressive Tax System

Tax becomes a lower proportion of income, decreasing tax burden as income rises

Progressive tax system

Tax becomes a higher proportion of income, increasing tax burden as income increases

how does the statutory incidence effect the supply and demand curve

the corresponding line shifts for the group that has the statutory incidence, ie supply line shifts when producers have statutory incidence

how is economic incidence shown on the S/D curve

the change in surplus after a tax represents the economic incidence

ETB

excess tax burden, DWL caused by tax, losses above and beyond the tax revenue.

two effects caused by a tax

income and substituion

EV

equivalent variation, amount in dollars which causes the same utlity loss as a tax

Showing EV on a two goods graph

difference between the initial and the parallel budget line

Showing tax revenue on a two goods graph

difference between the inital and final budget lines at point Z

efficency in tax

Minimises DWL when putting a tax on

horizontal equity in tax

people with the same ablity to pay are treated equaliy, with the same tax burden

vertical equity in tax

different ability to pay tax is taken into account, tax burden increases with income

Minimising admin and complainace cost

decreasing the costs made in paying tax, so larger amount of the costs for taxpayer becomes tax revenue instead of DWL

Tax evasion vs tax avoidance

evasion is illegally lying about income to pay less tax, avoidance is legally changing behaviour so less tax is paid

function for DWL

DWL = ɛ Q P *T^2

what is DWL caused by

distortion in behaviour, where someone has to select a less desireable bundle or behaviour

what is the formula for the tax burden of a lump sum tax

T = a, T/Y = a/Y

how does sub effect cause DWL

relative price changes cause sub effect, so consumer changes their bundle to an inefficient solution

4 characteristics of social insurance (emergency benefits)

compulsory, eligibilty based on past contributions, receiving it is based on an event removing income, not means tested

shortcoming of additive social welfare

assumes identical utility functions and fixed income, redistro of income incentivises the rich to make less money

are in kind transfers ever better than income

no, you can buy different things which can have a greater cumulative utlity effect

for whom might the inkind be identical to income transfer

someone who has a strong preference for targeted good.

justifications for social insurance

compulsory participation removes adverse selection, paternalistic solution to lack of foresight, decreases individuals decision making costs,

points to evaluate a tax system on

efficency, equity, minimising DWL, minimising admin costs, minimising tax evasion