Chapter 12 Taxation and Income Distribution

Chapter 12 valueationation and Income Distribution I. Impact of taskes on income distribution hard to gear up because of value income incidence II. task relative incidence a. Who actually pays a appraise income b. Legal Incidence who is legally responsible for paying a tax c. Economic Incidence who actually pays the tax d. Example tax of $1 is placed on $10 point how is income distribution affected i. Price stays at $10 income of vender reduced ii. Prices rises to $11 income of buyers reduced iii. Price rises to $10. 30 buyers pay $. 30 and sellers pay $. 70 e.To the extent taxes affect quantity sold and fixd, tax affects income of suppliers of inputs for the result. i. Example tax on petrol reduces gasoline consumption it reduces income of gasoline tanker truck take iners and drivers. ii. whitethorn reduce the income of furnace manufactures by reducing the toll of heating fuel. III. evaluate Incidence Perspectives a. People pay taxes non corporations b. How to gathering people for purposes of tax incidence i. Often think of producers and consumers 1. But consumers ar also producers and producers are also consumers 2. 0 of households own stock directly, otherwises own stock indirectly ii. By income Rich, Middle Class, Poor 1. How do you learn these categories? c. taxation affect both suppliers of inputs and consumers of a product. i. In practice dispose to ignore one side and do analytic thinking on the other 1. revenue in commodity ignore impacts on inputs 2. Tax on inputs, ignore impact on consumers d. Incidence depends on how prices are compulsive i. How taxes change prices determine who pays the taxes ii. Amount of eon is important more time more adjustment to taxes e. Tax incidence depends on how tax revenues are spend . Progressiveness of tax outline i. Policy says tax system should be progressive. ii. Higher income pay a higher percentage of taxes 1. ordinarily measured as increase in average tax judge taxes/incom e 2. Exemptions, deductions and marginal account structure affect average tax rate iii. 2 measures 1. Percentage change in tax rate shared out by percentage change in income 2. Percentage change in taxes divided by the percentage change in income 3. Measures raise produce different results IV. Partial Equilibrium Models of Tax Incidence a. Analyzes impact of tax on the marketplace in which tax was imposed b.Ignore impact of market change on other markets i. entrance if tax is small ii. Appropriate if market is small iii. Otherwise need general equilibrium analysis c. Tax incidence of a whole tax tax per unit of the good i. Legal incidence on buyers figure 12. 2 1. Tax reduces the demand curve for the product from the suppliers point of figure since at each price the consumer buys less of the product. pic ii. Legal incidence on seller figure 12. 3 1. Tax reduces the tote up curve for the product from the consumers point of view since at each price the suppliers supply less of the product pic iii. Economic incidence is independent of legal incidence 1. Arrive at same Price, Quantity, and tax split regardless of whether tax is on producer or supplier. a. Sales tax example iv. Tax incidence depends on relative elasticities of demand and supply v. Example Qd = 1,000 5P and Qs = 4P 80 Tax $45 per unit pic pic d. Tax incidence of an ad valorem tax tax per unit of the good i. A percentage tax kind of than a unit tax ii. Sales tax as compared to gasoline tax iii. More difficult to calculate but shifts demand as shown in figure 12. V. Payroll Tax Controversy a. Legal incidence 7. 5% nonrecreational by employer and 7. 5% paid by employee b. statutory distinction between employer and employee is irrelevant c. Economic split depends on pushover of supply of labor d. Logical that the labor supply is fairly inelastic i. Household provides certain amount of labor regardless of wage ii. May not be true in long run VI. Tax on Capital a. Increasingly keen perfec tly mobile b. travel to where return is highest after adjusting for risk c. Rate of return on capital same e precisewhere in world d.No single country can make suppliers of capital bear any portion of a tax on capital VII. Taxes in markets with monopoly power a. Impact of taxes same as in competitive markets b. Consumers and monopolist share tax depending on the snap fastener of demand c. Figure 12. 10 VIII. Taxes in oligopoly markets a. Impact of taxes difficult to determine b. Price increase resulting from reduction in output resulting from the tax may make a company more profitable IX. Tax on profits a. Tax on normal profits reduce investment because profit is return on capital and risk b.Tax on economic profits born entirely by company with change in behavior c. Seemly ideal tax but not very operational X. Tax Incidence and Capitalization a. Tax increase on real estate is capitalized into PV of property b. Borne entirely owners at time tax is levied c. May be reimbursed if p ublic expenditures increase property values XI. ecumenic Equilibrium Models a. Read first paragraph P 271 b. Generally not operational pic Po Pg Pn Q0 Q1 contribute Consumer consume Supplier perceive Demand Tax paid by Consumers Tax paid by SuppliersDeadweight liberation from Tax Consumer Losses and Producers losses Po Pg Pn Q0 Q1 Supply Demand Consumer Perceived Supply Tax paid by Consumers Tax paid by Suppliers Deadweight Loss Consumer Losses and Producer losses Deadweight Loss Consumer Losses and Producer losses Tax paid by Suppliers Tax paid by Consumers Consumer Perceived Supply Demand Supply 300 400 95 cxl cxx Deadweight Loss from Tax Consumer Losses and Producers losses Tax paid by Suppliers Tax paid by Consumers Supplier Perceived Demand ConsumerDemand Supply 300 400 95 20 200 120 140