1. TAXATION By
Chan Mei Shan(9)
Lee Wing Kam(17)

2. Classification of taxes
Proportional Tax: income ↑  tax rate is the same
Regressive Tax: income ↑  tax rate ↓
Progressive Tax: income ↑  tax rate ↑

3. Classification of taxes
Direct Tax: - e.g. income tax - levied directly on individual taxpayers - tax burden cannot be shifted - can be progressive or proportional
Indirect tax: - e.g. sales tax - tax levied on activities of individuals or on goods & services - tax burden can be shifted & it is always regressive in nature - 2 types: per unit tax & ad Valorem tax (% rate on the value of the item)

4. Tax burden: The amount of money one would have to be given to make one just as well off with the tax as one was without it.
Excess burden: The burden of tax in excess of the tax payment. I.e. Tax burden – tax payment

6. Taxes have distributional & allocational effects:
Transfers the income form the people to the government.
People’s income is redistributed.
The tax one pays is not a cost to society.
Taxes affect resources allocation & this imposes costs on society.
Therefore, only the allocational effects will result in losses to society.
Lump-sum tax has minimal allocational effect.

7. Taxes imposed on
price taker's market

8. Lump-sum Tax S2 MC S1 P2 P2=AR2=MR2 P1 P1=AR1=MR1 D Q2 Q1 Q1 Q2
AC2 P2
P2=AR2=MR2 P1
P1=AR1=MR1
AC1 D Q2 Q1 Q1 Q2
S fall, P increase, market output fall.
AC increase, MC unchanged since lump-sun tax is not affected the marginal cost.
The marginal firm / some other firms whose AC2 is now higher than P2 will quit. Therefore, no. of firms will reduce.
However, as the P rises, each of the surviving firms will expand output.

9. Per-Unit Tax S2 S1 P2 P2=AR2=MR2 P1 P1=AR1=MR1 D Q2 Q1 Q2 Q1
MC2
MC1 S1
AC2 P2
P2=AR2=MR2 P1
P1=AR1=MR1
AC1 D Q2 Q1 Q2 Q1
S fall, P increase, market output fall.
AC & MC increase.
The marginal firm / some other firms whose AC2 is now higher than P2 will quit. Therefore, no. of firms will reduce.
The surviving firms may not produce more because their MC are higher than before.

10. The imposition of tax on a price searcher:
Per-unit tax
Lump sum tax
Profit tax
Price ↑
Unchange
Output level ↓
Monopoly rent

11. What do you think
if HK is imposed
a sale tax?

12. Sales tax led the supply increased from S1 to S2.
S2(MC+tax)
S1(MC)
S1(MC) 12 A 10 10 8
D(MUV)
D(MUV) Q 10 Q 8 10
Deadweight loss
Sales tax led the supply increased from S1 to S2.
No change for the factor prices & in the Q of resources used for production. So, MC did not change.
P rises to $12 & Q reduces to 8 units.
MUV > MC, deadweight loss exist.

13. QUESTION
A per-unit tax imposed on cigarettes will tend to generate which of the following effects?
A. The quality of cigarettes will improve
B. The length of cigarettes will increase
C. Cigarettes will be sold by piece,not by package
D. A and B

14. D
Usually, only some characteristics of a good is subjected to taxation. Thus,there will be substitution of taxation characteristics by non-tax characteristics to decrease the tax liability.

15. It is the end of our presentation!!!
Thank you!!!!!!!!!!!!!!!