Transcript Chapter 14

TAXATION AND INCOME
DISTRIBUTION
Chapter 14
Vocabulary
•
•
•
•
Statutory Incidence
Economic Incidence
Tax Shifting
Partial Equilibrium Models
14-2
Tax Incidence: General Remarks
• Only people can bear taxes
– Functional distribution of income
– Size distribution of income
• Both sources and uses of income should be considered
• Incidence depends on how prices are determined
• Incidence depends on the disposition of tax revenues
– Balanced-Budget tax incidence
– Differential tax incidence
– Lump-sum tax
– Absolute tax incidence
14-3
Tax Progressiveness Can Be Measured
in Several Ways
• Average tax rate versus
marginal tax rate
• Proportional tax system
• Progressive tax system
• Regressive tax system
Tax Liabilities under a hypothetical tax
system
Income
Tax
Average Marginal
Liability
Tax Rate Tax Rate
$2,000
-$200
-0.10
0.2
3,000
0
0
0.2
5,000
400
0.08
0.2
10,000
1,400
0.14
0.2
30,000
5,400
0.18
0.2
14-4
Measuring How Progressive a Tax
System Is
v1 
T1
I1

I1  I 0
T0
I0
v2 
T1  T0
T0
I1  I 0
I0
14-5
Measuring How Progressive a Tax
System is – A Numerical Example
v1 
T1
I1

T0
I0
v2 
I1  I 0

.00025 
1000  800
300
1000
200
800

.0003 
1000  800
360
1000
240
800
T1  T0
T0
I1  I 0
I0
2.0 
300  200
200
1000  800
800
2.0 
360  240
240
1000  800
800
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Partial Equilibrium Models
• Models that study only one market and ignore
possible spillover effects on other markets
• Economic incidence depends on:
– Elasticities of Supply and Demand
– Tax Salience: the extent to which a tax rate is made
prominent to a taxpayer
• Economic incidence does not depend on
whether it is levied on Consumers or Producers.
14-7
Price
Unit Tax on Commodities
2.60
2.40
S1
2.20
Before
Tax
After
Tax
2.00
S0
1.80
Consumers
Pay
$1.20
$1.40
1.60
1.40
1.20
Suppliers
Receive
$1.20
$1.00
1.00
0.80
D0
0.60
0
1
2
3
4
5
D1
6
7
8
Quantity
14-8
Price
2.6
SX
2.4
Perfectly
Inelastic
Supply
2.2
2
S
1.8
1.6
1.4
1.2
1
0.8
0.6
0
1
2
3
4
5
DX’
DX
6
7
Quantity
8
14-9
Price
2.6
2.4
2.2
2
S
1.8
Perfectly
Elastic
Supply
1.6
1.4
SX
1.2
1
0.8
DX
0.6
0
1
2
3
4
5
DX’
6
7
Quantity
8
14-10
Price per Pound of food
Ad Valorem Taxes
Sf
Pr
P0
Pm
Df
Qr
Q0
Qm
Df ’
Pounds of food per year
14-11
Taxes on Factors
Statutory vs. Economic Incidence
• The Payroll Tax
– Tax on labor that finances Social Security
• Tax on Capital in a Global Economy
14-12
Wage rate per hour
The Payroll Tax
SL
Pr
wg = w0
wn
DL’
L0 = L 1
DL
Hours per year
14-13
Commodity Taxation without Competition
• Monopoly
– Despite market power a monopolist is generally
made worse off
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•
•
•
QD does down
Price paid by consumers goes up
Price received by the monopolist goes down
Profits go down
• Oligopoly
– Can result in higher or lower profits
14-14
Monopoly
$
Economic
Profits
MXX
c
P0
Economic Pn
i
Profits
dh
after unit
tax ATC0
a
f
g
ATCX
b
DX
MRX
X1 X 0
MRX’
DX’
X per year
14-15
Profits Taxes
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•
•
•
Economic profit
Perfect competition
Monopoly
Measuring economic profit
14-16
Tax Incidence and Capitalization
• PR = $R0 + $R1/(1 + r) + $R2/(1 + r)2 + … +
$RT/(1 + r)T
• PR' = $(R0 – u0) + $(R1 – u1)/(1 + r) + $(R2 –
u2)/(1 + r)2 + … + $(RT – uT)/(1 + r)
• u0 + u1/(1 + r) + u2/(1 + r)2 + … + uT/(1 + r)T
• Capitalization: A stream of tax liabilities
becomes incorporated into the price of an
asset
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General Equilibrium Models
• Show how various markets are interrelated
• Consider a 2-commodity, 2-factor economy resulting in the following
9 possible ad valorem taxes
tKF = a tax on capital used in the production of food
tKM = a tax on capital used in the production of manufactures
tLF = a tax on labor used in the production of food
tLM = a tax on labor used in the production of manufactures
tF = a tax on the consumption of food
tM = a tax on consumption of manufactures
tK = a tax on capital in both sectors
tL = a tax on labor in both sectors
t
= a general income tax
14-18
Tax Equivalence Relations
• Partial factor tax: tax levied on an input in only some of its
uses.
– tKF, tLF, tKM, tLM
• Tax Equivalence: any two sets of taxes that generate the
same changes in relative prices.
tKF
and
and
tKM
tLF
are equivalent to
and
and
tLM
tF
and
are equivalent to
tM
are
are
are
equivalent
equivalent
equivalent
to
to
to
tK
and
tL
are equivalent to
t
Source: McLure [1971].
14-19
The Harberger Model
• Assumptions
– Technology
• Elasticity of substitution
• Capital intensive
• Labor intensive
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–
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–
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Behavior of factor suppliers
Market structure
Total factor supplies
Consumer preferences
Tax incidence framework
14-20
Analysis of Various Taxes
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•
•
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Commodity tax (tF)
Income tax (t)
General tax on labor (tL)
Partial factor tax (tKM)
– Output effect
– Factor substitution effect
14-21
Some Qualifications
• Differences in individuals’ tastes
• Immobile factors
• Variable factor supplies
14-22
An Applied Incidence Study
Average Federal Tax Rates and Share of Federal Taxes
by Income Quintile (2009)
Income Category
Average Federal Tax Rate
Lowest Quintile
1.0%
Second Quintile
6.8%
Third Quintile
11.1%
Fourth Quintile
15.1%
Highest Quintile
23.2%
All Quintiles
17.4%
Top 1%
28.9%
Source: Congressional Budget Office (2012a)
Share of Federal Taxes
0.3%
3.8%
9.4%
18.3%
67.9%
100.0%
22.3%
14-23
Chapter 14 Summary
• Who bears the burden of a tax? It depends on price
changes, which, in turn, depend on:
–
–
–
–
–
–
Time frame
Disposition of tax revenue
Market structure
Elasticities of supply and demand
Mobility of factors of production
Tax salience
• Partial equilibrium incidence and general equilibrium
incidence analyses are used to determine burdens of
unit and ad-valorem taxes
14-24