1. Public Finance by John E. Anderson Power Point Slides to Accompany:

2. Chapter 12 Equity Aspects of Taxes and Expenditures

3. Copyright © by Houghton Mifflin Company. All rights reserved.3 Introduction In this chapter we are concerned about who bears the burden of taxation. That requires knowledge of who really bears the burden, Not just knowing what the law says about who is required to pay.

4. Copyright © by Houghton Mifflin Company. All rights reserved.4 The Incidence of Taxes Tax incidence is about who the burden of taxation falls upon. When a tax is applied to goods consumers purchase, for example, one might think that they bear the burden of the tax. But the tax raises the price of the good, and reduces the quantity consumers wish to buy.

5. Copyright © by Houghton Mifflin Company. All rights reserved.5 The Incidence of Taxes, [continued] Consequently, the producer is affected by the tax as well. Similarly, if the tax is applied to the producer, there are economic consequences for both producers and consumers. We consider each of these possibilities, examining the precise burdens in each case.

6. Copyright © by Houghton Mifflin Company. All rights reserved.6 The Concept of Incidence Economic incidence Economic vs. statutory incidence

7. Copyright © by Houghton Mifflin Company. All rights reserved.7 Figure 12.1: Effect of a Unit Tax on Demand

8. Copyright © by Houghton Mifflin Company. All rights reserved.8 Partial Equilibrium Tax Incidence First, we consider the issue of tax incidence in a single market. In this case, we examine how the tax affects equilibrium price and quantity in one market. Since other markets are not considered, we call this type of analysis partial equilibrium analysis.

9. Copyright © by Houghton Mifflin Company. All rights reserved.9 Figure 12.2: Incidence of a Unit Tax Applied to Consumers

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11. Copyright © by Houghton Mifflin Company. All rights reserved.11 Figure 12.3: The Effect of a Unit Tax on Supply

12. Copyright © by Houghton Mifflin Company. All rights reserved.12 Figure 12.4: Incidence of a Unit Tax Applied to Producers

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14. Copyright © by Houghton Mifflin Company. All rights reserved.14 Incidence of an Ad Valorem Tax If the tax is applied to the value of the good, the size of the tax rises with the price. Hence, we must model the tax as increasing with price.

15. Copyright © by Houghton Mifflin Company. All rights reserved.15 Figure 12.5: Effect of an Ad Valorem Tax on Supply

16. Copyright © by Houghton Mifflin Company. All rights reserved.16 Figure 12.6: Incidence of an Ad Valorem Tax Applied to Producers

17. Copyright © by Houghton Mifflin Company. All rights reserved.17 What Determines Producer’s and Consumer’s Incidence? Most fundamentally, the incidence of a tax is determined by two factors: Price elasticity of demand, and the. Price elasticity of supply. It is the relative size of these two elasticities that determine the tax burden.

18. Copyright © by Houghton Mifflin Company. All rights reserved.18 Figure 12.7: The Incidence of a Unit Tax Depends on the Elasticity of Demand

19. Copyright © by Houghton Mifflin Company. All rights reserved.19 Figure 12.8: The Incidence of a Unit Tax Depends on the Elasticity of Supply

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21. Copyright © by Houghton Mifflin Company. All rights reserved.21 Tax Incidence Effects in Multiple Markets So far, we have only considered the effect of a tax in a single market. Now, we turn to consideration of a tax applied in one market that has effects in other markets as well.

22. Copyright © by Houghton Mifflin Company. All rights reserved.22 Figure 12.9: Tax Effects on Related Goods

23. Copyright © by Houghton Mifflin Company. All rights reserved.23 Figure 12.10: General Equilibrium Incidence of a Taxation of Capital in the Corporate Sector

24. Copyright © by Houghton Mifflin Company. All rights reserved.24 Equity Concepts Horizontal equity: treat equals equally Vertical equity: treat unequals unequally Defining equals is a problem: Do we use income, wealth, or consumption?

25. Copyright © by Houghton Mifflin Company. All rights reserved.25 Equity Concepts, [continued] Conflicts can arise between horizontal and vertical equity. Suppose that we grant a property tax exemption for the first $100,000 of property value for agricultural land owners. We might consider that change an improvement in the vertical equity of the property tax, making the tax more progressive, but it also worsens the horizontal equity of the property tax when we consider property owners in the residential, commercial, and industrial classes of property.

26. Copyright © by Houghton Mifflin Company. All rights reserved.26 Figure 12.11: Effect of the Tax and Expenditure System on the Income Distribution

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