10.01.2024 Tax Incidence#

Three rules#

  1. Statutory burden \(\neq\) economic burden

  2. side of the market = irrelevant

  3. parties with inelastic supply = bear taxes

Statutory and economic incidence#

Economic Incidence: burden of taxation measured by change in resources available

statutory incidence: burden borne by party that sends check to gov.

Example:

img

Calculation for Consumers:

\[ burden= (price_{post-tax}-price_{pre-tax})+ \text{per unit tax payments by c.} \]

Producers vice versa

Tax Wedge: difference between consumers pay and producers receive

e.g consumers pay 1.8, producers receive 1.30 => wedge is 0.5 to government

Tax Side does not matter#

Exampel from before, but other sideimg

Gross Price: market price

After-Tax price: gross - tax

Elasticity#

inelastic demand

elastic demand

img

burden at consumers

burden at producers

Vice-versa for supply side

img

also applies for factor markets!

Balanced Budget Incidence#

Tax Incidence Analysis that accounts or tax & benefit

  • Hard to determine

  • analysis of tax benefits

General Equilibrium Tax Incidence#

partial Equilibrium tax incidence: tax effect on one market in isolation

general equilibrium tax incidence: tax effect on related markets

  • Vertically (within market)

  • horinzontally (across markets)

Issues:

  • elasticities differ in long / short run

  • spill over effects

  • easines to find untaxed subsitutes (tax scope)

Example: Tax on Restaurant

effects on other goods

  • Income Effect

  • Substitution Effect

  • Complementary Effect

e.g higher demand for movies as alternative time

Exercise#