Economics of Taxation and Tax Incidence

Vocabulary flashcards covering the concepts of taxation, public goods, sales versus excise taxes, tax wedges, and the independence of tax incidence.

Public goods

Goods and services deemed necessary or desirable by society—such as police forces, fire protection forces, parks, and roads—that lack the incentive for profitability and are provided by the government using tax revenue.

Sales tax

A form of taxation charged as a percentage of the purchase price, such as $7\%$, $8\%$, or $10\%$.

Excise tax

A tax levied as a fixed monetary amount per unit of a good sold, such as a per-gallon tax on gasoline or a per-pack tax on cigarettes.

Tax incidence

The distribution of the economic burden of a tax between buyers and sellers, which is determined by market forces rather than which party legally has the tax levied on them.

Tax wedge

The gap driven by a tax between the higher price buyers pay and the lower price sellers receive, where the height of the wedge is equal to the amount of the tax.

Effect of a tax on buyers

A reduction in buyers' willingness to pay that shifts the market demand curve down (or to the left) by the exact amount of the tax.

Effect of a tax on sellers

An increase in the price sellers require to supply goods that shifts the market supply curve up (or to the left) by the exact amount of the tax.

Independence of tax incidence

The principle that the final market outcome, equilibrium quantity, and division of the tax burden are completely identical whether a tax is legally levied on buyers or on sellers.