Taxes and Tax Incidence

Flashcards covering key vocabulary related to taxes, tax incidence, excise taxes, elasticity and tax burden, tax equivalence, and deadweight loss from lecture notes.

Tax Incidence

Refers to who ultimately pays the tax.

Statutory Incidence

The party legally responsible for paying the tax to the government (who 'writes the check').

Economic Incidence

The party who actually bears the economic burden of the tax, measured by changes in consumer and producer surplus.

Consumer (Economic Incidence)

Bears the economic burden of a tax through a higher price paid for a good, resulting in lower consumer surplus.

Producer (Economic Incidence)

Bears the economic burden of a tax through a lower price received for a good, resulting in lower producer surplus.

Excise Tax

A tax levied on a particular commodity or good.

Per Unit Tax

An excise tax based on the quantity of a good (e.g., per gallon of gasoline, per pack of cigarettes).

Ad Valorem Tax

An excise tax based on the price or value of a good, typically expressed as a percentage of the price.

Impact of Per Unit Tax on Supply Curve

Causes the supply curve to shift up by the amount of the tax, as it increases the 'cost of production'.

Pc (New Price Consumers Pay)

The higher price consumers pay for a good after a tax is imposed, compared to the old equilibrium price (P*).

Ps (New Price Suppliers Receive)

The lower price suppliers receive for a good after a tax is imposed, compared to the old equilibrium price (P*).

Wedge (Tax Effect)

A gap created between the price consumers pay (Pc) and the price suppliers receive (Ps) due to a tax, where Pc = Ps + Tax.

Quantity Transacted (QT) after Tax

The quantity of goods exchanged falls below the efficient quantity after a tax is imposed.

Deadweight Loss (DWL)

A loss of total surplus (consumer and producer surplus) that occurs when a tax distorts incentives, causing the quantity transacted to differ from the efficient quantity.

Time-shifting Purchases

Households buying goods ahead of a sales tax increase to avoid the higher tax.

Elasticity and Tax Burden

The side of the market that is more inelastic (less able to adjust behavior) will bear more of the tax burden.

Inelastic Demand and Tax Burden

If demand is relatively more inelastic, demanders will pay more of the tax.

Elastic Demand and Tax Burden

If demand is relatively more elastic, demanders will pay less of the tax.

Tax Equivalence

The principle that statutory incidence does not matter for economic incidence; the outcomes are the same whether the tax is legally levied on demanders or suppliers.

FICA (Federal Insurance Contributions Act)

A federal tax that pays for the Social Security and Medicare systems.

Economic Incidence of FICA

Mainly falls on workers (suppliers of labor) in the form of lower wages, due to labor supply being much more inelastic than labor demand.

Tax Revenue (from Excise Tax)

Calculated as the Excise Tax Rate multiplied by the Quantity Transacted.

Tax Rate and Tax Revenue Relationship

An increase in the tax rate increases revenue per unit but reduces the tax base (quantity transacted), so doubling the tax rate does not double tax revenue.

Deadweight Loss and Elasticity

The size of deadweight loss is greater when demand and/or supply is more elastic (meaning quantity transacted deviates more from the efficient quantity).

Minimizing Inefficiency from Taxes

To minimize deadweight loss and inefficiency, taxes should be imposed on goods with relatively inelastic demand or supply.