ECON 201, Week 8
ECON 201, Week 8 ECN 201 (Professor Colleen Scott)
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ECN 201 (Professor Colleen Scott)
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This 1 page Class Notes was uploaded by Thanh Notetaker on Thursday March 24, 2016. The Class Notes belongs to ECN 201 (Professor Colleen Scott) at La Salle University taught by Colleen Scott in Spring 2016. Since its upload, it has received 18 views. For similar materials see Introductory Microeconomics in Economcs at La Salle University.
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Date Created: 03/24/16
ECON 201. Week Eight (March 24 note)h Taxes Everything you earn and most things you buy are taxed. Who really pays these taxes? Income tax and the Social Security tax are deducted from Your pay, and state sales tax is added to the price of the things you buy, so isn’t it obvious that you pay these taxes? Isn’t it equally obvious that your employer pays the employer’s contribution to the Social Security tax? You’re going to discover that it isn’t obvious who pays a tax and that lawmakers don’t decide who will pay! Tax Incidence Tax incidence is the division of the burden of a tax between buyers and sellers. When an item is taxed, its price might rise by the full amount of the tax, by a lesser amount, or not at all. If the price rises by the full amount of the tax, buyers pay the tax. If the price rises by a lesser amount than the tax, buyers and sellers share the burden of the tax. If the price doesn’t rise at all, sellers pay the tax. Tax incidence doesn’t depend on tax law! The law might impose a tax on buyers or sellers, but the outcome will be the same. Tax Incidence and Elasticity of Demand The division of the tax between buyers and sellers depends on the elasticities of demand and supply. To see how, we look at two extreme cases. the entire tax. The more inelastic the demand, the larger is the buyers’share of the tax. Tax Incidence and Elasticity of Supply To see the effect of the elasticity of supply on the division of the tax payment, we again look at two extreme cases. entire tax. The more elastic the supply, the larger is the buyers’ share of the tax.
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