Chapter 7 – Taxes

Taxes Overview

• Central questions: Effects on supply and demand, tax burden, costs vs. benefits, progressive vs. regressive taxes, U.S. tax structure.

Effect of Tax on Price and Quantity

• Taxes create a disparity between buyers' price and sellers' received price.

• Tax incidence measures who actually pays the tax.

Excise Tax Example (Hotel Rooms)

• $40 excise tax imposed on suppliers.

• Price increase: Equilibrium price rises from $80 to $100.

• Buyers bear part of burden (price increase), sellers also bear burden (net price decrease).

Tax Incidence

• Determined by elasticity of demand and supply.

• Low demand elasticity = consumers bear more burden.

• High demand elasticity = producers bear more burden.

Tax Revenue

• Tax Revenue = Height × Width.

• Increasing tax rate does not always lead to increased revenue. Depends on elasticities.

• High elasticities can reduce sales significantly, impacting revenue negatively.

Cost of Taxation

• Deadweight loss occurs from reduced mutually beneficial transactions (QE − QT).

• Includes administrative costs and inefficiencies in society.

Tax Fairness vs. Efficiency

• Benefits principle: Taxation based on public spending beneficiaries.

• Ability-to-pay principle: Higher abilities lead to higher tax burden.

• Trade-off exists between tax equity and efficiency.

Understanding the Tax System

• Tax base determines tax payments (income, payroll, sales, etc.).

• Progressive tax: Higher share from high-income taxpayers.

• Regressive tax: Lower share from high-income taxpayers.

Taxes in the U.S.

• Tax competition affects high-income tax rates.

• Major federal and state taxes breakdown for 2022, indicating amounts collected and percentages based on income categories.