Taxation, Incidence, Distribution Recap: The statutory burden of a tax does not describe who really bears the tax. The side of the market on which the tax is imposed is irrelevant to the distribution of tax burdens. Parties with inelastic supply or demand bear taxes; parties with elastic supply or demand avoid them.

The Three Rules of Tax Incidence 19 . 1 The Three Rules of Tax Incidence The Statutory Burden of a Tax Does Not Describe Who Really Bears the Tax

Example 1. Impact and incidence of a producer tax on apples Demand for apples: Qd = 2000-100P Supply of Apples Qs = -100 + 200P A $2 per bushel tax is placed on producers a. who bears the statutory incidence of tax? b. who bears the economic incidence of the tax? Cons. tax burden: pretax P-post-tax P + tax remitted Prod. tax burden: post-tax P-pretax P + tax remitted

Taxation and Efficiency Ch 15

Introduction Excess burden is a loss of welfare above and beyond the tax revenues collected. also refer as welfare cost or deadweight loss Other Key Concepts: Consumer surplus, social surplus

Taxation and Economic Efficiency Graphical Approach

Taxation and Economic Efficiency 20 . 1 Taxation and Economic Efficiency Elasticities Determine Tax Inefficiency The inefficiency of any tax is determined by the extent to which consumers and producers change their behavior to avoid the tax; deadweight loss is caused by individuals and firms making inefficient consumption and production choices in order to avoid taxation.

Taxation and Economic Efficiency 20 . 1 Taxation and Economic Efficiency Elasticities Determine Tax Inefficiency

Excess burden = ½ ηPgq1tg^2 Excess burden: loss of welfare above and beyond taxes collected η = (eta) elasticity of demand Pg = Price of gas q1= pretax equilibrium quantity tg ^2= tax rate

Excess Burden: Airline ticket example Federal airline tax of 10% Value of tickets sold: $86 billion Price elasticity of D (η): 1.0 Excess burden: ½ ηPaq1ta^2