Chapter 7 - Taxes

ECON:1100 Final Exam

Taxes

a wedge driven between price buyers pay and price sellers receive

Incidence

part of a tax that is a measure of who really pays it

What effect does a tax have?

it generates revenue and creates deadweight loss

When is an excise tax mainly paid by producers?

when the price elasticity of demand is high and price elasticity of supply is low

When is an excise tac mainly paid by consumers?

when price elasticity of demand is low and price elasticity of supply is high

Calculating the tax revenue from an excise tax

tax revenue collected=height*width

Why does increasing the tax rate not necessarily increase revenue?

because tax increase means the gov. raises more revenue with each unit sold, but on the other side it reduces quantity of sales which decreases tax revenue

What is the total inefficiency of a tax?

administrative costs + DWL

Administrative costs

the resources used for its collection

What happens when the price elasticity is greater?

the greater it is for demand or supply, the greater the tax-induced fall in the quantity traded

What happens when the price elasticity is lower?

the lower it is for demand or supply, the smaller the tax-induced fall in the quantity traded

What are the two principles of tax fairness and efficiency?

benefits principle and ability-to-pay principle

Benefits principle

those who benefit from public spending should bear the burden of the tax the pays for that spending

Ability-to-pay principle

those with greater ability to pay a tax should pay more

Income tax

depends on income from wages and investments

Payroll tax

depends on the earnings an employer pays an employee

Sales tax

the value of the goods sold

Profit tax

on a firm’s profit

Property tax

on the blue of property such as a home

Wealth tax

a tax that depends on an individual’s wealth

Tax structure

specifies how the tax depends on the tax base

Progressive tax

takes a larger share of high-income taxpayers than that of low-income taxpayers

Regressive tax

takes a smaller share of the income high-income tax-payers than that of low-income taxpayers

Marginal tax rate

the percentage of an increase in income that is taxed away