microeconomics ch 9 taxes
microeconomics ch 9 taxes ECON 211
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This 3 page Class Notes was uploaded by Addie Pearson on Friday April 8, 2016. The Class Notes belongs to ECON 211 at Clemson University taught by prof fiore in Winter 2016. Since its upload, it has received 146 views. For similar materials see Micro Economics in Economcs at Clemson University.
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Date Created: 04/08/16
Commodity Taxes (ch 6) We will emphasize the following: 1) who ultimately pays the tax is NOT dependent on who writes the check a. doesn’t matter if the tax is placed on consumers or producers; it all goes back to the government b. tax on producers; will just raise per unit cost by t (tax) and thus, decrease supply by t. i. increases the market price to P’ and reduces the market quantity to Q’, thus reducing gains from trade ii. What producers actually take home “after taxes” is P’-t iii. A “wedge” has been created between what consumers pay (P’) and what producers receive (P’ - t) 1. Tax wedge means price can no longer do its job indicating both costs and benefits at the margin c. Tax on the consumers. Suppose consumers pay a tax t for every unit bought i. This reduces their willingness to pay by t per unit, decreasing the demand by t. ii. This reduces the market price to P’’ and market quantity to Q’’, reducing gains from trade iii. Noe what consumers pay in total “after taxes” is P’’ + t iv. A wedge has again been created between what consumers pay (P’’ + t) and what producers receive (P’’) d. IT DOES NOT MAKE A DIFFERENCE e. Easy to see with algebra… i. Tax on consumers: Pd = Ps + t ii. Tax on producers: Pd – t =Ps iii. They are the same! 2) who ultimately pays the tax does depend on the relative elasticities of supply and demand 3) taxation raises government revenue but creates lost gains from trade (deadweight loss ((( CH 4 QUIZ ANSWERS ONLINE ))) The burden of the tax depends on the elasticities of demand and supply - demand is more elastic than supply (demand is less steep than supply) o consumers pay: Pd o producers receive: Ps o result: most of the tax is paid by the SELLERS - supply is more elastic than demand (supply is less steep than demand) o result: most of the tax is paid by the BUYERS - ex: health insureance mandates o suppose the govt mandates that firms buy health insurance for their workers. Think of this as a tax on the labor market (on employers) o Who actually pays for the health insurance? Depends on which is more elastic: demnd or supply It is easier for firms to escape the tax by not employing or workers to avoid it by not working? o Firms can avoid the tax in a lot of ways Substitute capital for labor Move operations overseas Close down o More difficult for workers to avoid tax Cost of leaving the labor force is high o Conclusion: demand is more elastic than supply o Result: workers pay for most of the health insurance through lower wages - Ex: who pays the cigarette tax? o Producers can easily avoid tax (state tax) Sell in different state Sell overseas Stop selling o Consumers are addicted o Conclusion: supply is more elastic than demand Tax revenue and lost gains from trade - Pd, Ps, deadweight loss make a sqare that is the tax revenue (FIND CHARTS) - Tax revenue = t x Qtax - Relatively elastic demand and supply vs relatively inelastic demand and supply GRAPHS GRAPHS GRAPHS Tax policy inplications 1. If your goal is to raise tax revenue, you want to tax something INELASTICALLY supplied AND demanded a. Ex: tax on yachts i. Seems like a good way to tax the rich… ii. Turns out demand for yachts is very elastic (we’ll just buy something else!) iii. Hurts the yacht makers iv. NOT A GOOD MARKET TO TAX FOR TAX REVANUE b. Ex: income tax vs consumption (sales) tax i. How much productive labor do we lose because of income tax? ii. This is why many argue for a consumption tax iii. Most don’t like consumption tax bc a consumption tax because it is not progressive (doesn’t tax the rich more) 2. If your goal is to reduce quantity you must make sure demand is not too inelastic for the price increase to have much effect a. Ex: cigarette tax to reduce smoking i. Turns out, demand of tobacco is very inelastic ii. Study: need about an 100% tax just to reduce cigarette consumption by 5%, so a cigarette tax won’t be very effective Subsidies - A subsidy is a “reverse tax” - Suppose the govt gives a subsidy of size “s” to consumers for every unit bought - Demand will increase - Subsidy is paid for by the tax payers - Results in inefficient increases in trade - Gov’t tool to increase activity
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