Chapter 7: Taxes

Excise tax

A tax on each unit sold.

Tax incidence

Who actually bears the burden of a tax.

Who bears more of the tax?

The side that is less elastic bears more burden.

Consumer tax burden

Portion paid through higher prices.

Producer tax burden

Portion paid through lower revenue.

Wedge

Difference between price buyers pay and price sellers receive after tax.

Deadweight loss (from tax)

Loss in total surplus from reduced trade.

Administrative costs

Resources used to collect and comply with taxes.

Efficiency in taxation

Low deadweight loss relative to revenue.

Laffer curve

Shows relationship between tax rate and total revenue.

Benefits principle

Those who benefit from public services should pay.

Ability-to-pay principle

Those with greater ability should pay more.

Progressive tax

Takes a larger income share from high earners.

Regressive tax

Takes a smaller income share from high earners.

Proportional tax

Same percentage from all income levels.

Q: When does consumer bear more of a tax?

Demand inelastic, supply elastic.

Q: When does producer bear more of a tax?

Demand elastic, supply inelastic.

Q: What two factors determine deadweight loss size?

Tax size and elasticities of supply/demand.