1 Tax Incidence: Who actually pays sales taxes?

2 Tax Incidence = Economic Tax Burden  Incidence of transaction costs  Sales taxes  Shipping costs  Commission fees….

3 Supply Demand Framework  Two prices  The after-tax price paid by the buyer  The before-tax price received by the seller  Tax incidence: the difference between the prices paid/received and the price in the absence of the tax

4 Elasticity of Demand and Shifting of Tax Incidence  Demand for Delta airfares  Many perfect substitutes  Demand for Air travel  Few imperfect substitutes  Demand for Gasoline  Generally no substitutes

5 Examples  Excise taxes on  Gasoline  Fall of 2005 GA  Alcohol and Tobacco  Export tariffs on natural resources  Shipping costs  eBay 2000: for every $1 increase in the shipping costs the price fell by$0.55  Real estate commissions

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7 Supply Elasticity and Tax Incidence  The less flexible party pays the larger burden