Transcript Document

Chapter 6
Taxation Efficiency and Income
Distribution
1
In Em, M. Sc. in Economics
Learning objectives
 Lump-Sum Taxes
 Price Distorting Taxes
 Efficiency Loss Ratio of a Tax
 Incidence of a Taxation
 Independence of Legal and Economic Incidence
 General Equilibrium Analysis and Shifting
 Government Taxes and Expenditures
 Summary of the chapter
2
In Em, M. Sc. in Economics
Lump-Sum Taxes
 A Lump-sum tax is a fixed tax that is owed by
everyone and is not subject to anything taxpayers can
change.
 It is independent of income, consumption, or wealth.
 An example is a Head Tax, which is constant for
everyone.
3
In Em, M. Sc. in Economics
Inefficiency in Taxation and the Lump-Sum Tax
 Inefficiency in taxation results from the ability to
avoid taxes by avoiding a taxed activity.
 Because lump-sum taxes are unavoidable, they
serve as the benchmark by which other taxes are
measured in terms of efficiency.
4
In Em, M. Sc. in Economics
Price Distorting Taxes
 A price distorting tax alters the relative price of
goods.
5
In Em, M. Sc. in Economics
Expenditure on Other Goods
per Year (Dollars)
Figure 11.1 A Price Distorting Tax Versus
A Lump-Sum Tax
A
T
Y*
L
T
YT
Y1
E
E''
U1
0
6
E'
In Em, M. Sc. in Economics
U2
B'
L'
Q1
QT QL
Gasoline per Year (Gallons)
U3
B
Individual Excess Burden of a Tax
The individual excess burden of a tax is the loss in
well-being when a taxpayer pays taxes under a pricedistorting tax instead of under a lump-sum tax.
7
In Em, M. Sc. in Economics
Community Charges in the U.K.
 The Thatcher government replaced local property
taxes with a form of lump-sum tax called “the
community charge.’’
 The tax was set by each local council and charged
a fixed amount per adult taxpayer.
 Despite its efficiency, the lump-sum tax was
viewed as so unfair by many taxpayers that they
refused to pay it.
8
In Em, M. Sc. in Economics
Unit Taxes
 A unit tax adds to the price by a fixed amount.
Examples include the 32 cents per pack of cigarettes
and 24 cents per gallon of gasoline in federal taxes.
9
In Em, M. Sc. in Economics
Tax Terms
 The Gross Price (PG) is the price paid by consumers.
 The Net Price (PN) is the price received by producers
after the tax is paid.
 PN = PG – T
10
In Em, M. Sc. in Economics
Figure 11.2 Impact of A Unit Tax on
Market Equilibrium
ST = MSC + $0.25
Price (Dollars)
S = MSC
Tax Revenue
1.15 = PG
1.00
0.90 = PN
C
A
B
T = $0.25
DQ
0
11
Excess Burden
In Em, M. Sc. in Economics
D = MSB
Q1 Q*
Gasoline per Year (Gallons)
Excess Burden of a Unit Tax
DWL = 1/2TQ =1/2×T2×(Q*/P*)×(ESED)/(ES – ED)
(A Step-by-step algebraic derivation is in the appendix to Chapter 11)
12
In Em, M. Sc. in Economics
Implication of the DWL Calculation
 A doubling of the per-unit tax quadruples the
Deadweight Loss.
13
In Em, M. Sc. in Economics
Figure 11.3 Excess Burden When Demand or Supply is
Perfectly Inelastic
A
Demand
Supply
after Tax
B
Supply
Price
Price
Supply
Demand
Net Price
after Tax
0
14
q
Quantity per Month
In Em, M. Sc. in Economics
0
q
Quantity per Month
Efficiency Loss Ratio of a Tax
 The Efficiency Loss Ratio is the deadweight loss per
dollar of revenue raised DWL/R .
 Estimates of U.S. tax system place ELR at between 25
and 40 cents per dollar of tax revenue raised.
15
In Em, M. Sc. in Economics
Incidence of a Tax
 The Legal Incidence is the burden of a tax as determined
by those who are legally obligated to pay the tax.
 The Economic Incidence is the burden of a tax as
determined by how much the parties are affected in terms
of paying higher prices, or receiving lower prices.
16
In Em, M. Sc. in Economics
Shifting of Taxes
 Forward Shifting is the transfer of the burden of a tax
from the seller, who is legally obligated to pay it, to a
buyer.
 Backward Shifting is the transfer of the burden of a tax
from the buyer, who is legally obligated to pay it, to a
seller.
17
In Em, M. Sc. in Economics
Ad-Valorem Taxes
 Ad-Valorem Taxes add a fixed percentage to the price
of a good.
 The primary example is sales taxes.
18
In Em, M. Sc. in Economics
Incidence of an Ad-valorem tax
DWL = 1/2 TQ
T = tPG
= 1/2 t2PG2(Q*/P*) × (ESED)/(ES – ED)
if t is very small, then this is approximately
= 1/2 t2P*Q*(ESED)/(ES – ED)
19
In Em, M. Sc. in Economics
Using Excise Taxes on Alcohol to Internalize
Externalities
 Federal taxes on alcohol are per-unit rather than ad-
valorem.
 32 cents per six-pack of beer ($.10/oz)
 $13.50 per gallon of 100 proof liquor ($.25/oz)
 Externalities associated with alcohol are estimated at
$0.48 per ounce (of hard liquor).
20
In Em, M. Sc. in Economics
Figure 11.4 Impact of an Ad Valorem Tax on Labor
S
Wages (Dollars)
Excess
Burden
WG = 5.20
5.00
E
WN = 4.16
E'
D = Gross Wage
Tax Revenue
Net Wage = WG (I – t)
Q1 Q*
0
Labor Hours per Year
21
In Em, M. Sc. in Economics
Independence of Legal and Economic Incidence
 Economically, it does not matter whether the buyer
or seller is legally liable for a tax.
 The economic incidence of the tax is determined
by supply and demand elasticities, the amount of
the tax, and the original equilibrium price and
quantity.
22
In Em, M. Sc. in Economics
Figure 11.5 Incidence of a Tax Collected From Buyers
S = MSC
C
Price (Dollars)
PG + T =1.15
B
1.00
PG = 0.90
A
D = MSB
D' = MSB –
0
23
In Em, M. Sc. in Economics
Q1 Q*
Price per Year (Gallons)
T
Figure 11.6 The More Inelastic the Demand, the Greater the
Portion of a Tax Borne by Buyers
Price (Dollars)
S = MC + $0.25
C
1.20
1.15
1.00
.95
.90
S = MC
E
B
A
D’
Q’
Q’
0
24
In Em, M. Sc. in Economics
Q1 Q2 Q*
Gasoline per Year (Gallons)
D
Price (Cents)
Figure 11.7 Impact of a Tax on a Good with
a Perfectly Elastic Supply
E'
60
50
E
MC + T = S'
MC = S'
D
0
25
Q*
Housing per Month Square Feet
Q
1
In Em, M. Sc. in Economics
Figure 11.8 Tax Incidence When
Market Supply is Perfectly Inelastic
Wages (Dollars)
S
E
WG*
tw*G
WN= WG*(1-t)
F
D=W
WN= WG*(1-t)
0
26
In Em, M. Sc. in Economics
Q*
Labor Hours per Year
Shifting Under Imperfect Competition
 Monopolists can shift less of a given tax forward to
consumers than can a competitive industry.
27
In Em, M. Sc. in Economics
Figure 11.9 Shifting Under Monopoly
Price
MC + T
PMT PM
PM
P*T
P*
P*
MC
D
QM
Q*
MR
QMT QM Q*T Q*
28
In Em, M. Sc. in Economics
Output per Year
General Equilibrium Analysis and Shifting
 When one good is taxed and another good is not taxed, the
impact of the tax is not confined to the taxed good.
 Because a tax on one good lowers the profit that can be
made to firms producing it, they may shift their productive
resources to the other good so as to maximize their after-tax
rate-of-return in both markets.
 This has the effect of equalizing the after-tax rate-of-return.
29
In Em, M. Sc. in Economics
Figure 11.10 Multimarket Analysis of Excess Burden
A
E2
PF(1 + t)
Price
B
E1
PF
A
QF
PC(1 + t)
PC
E1
B
QC
DF
Food per Year
In Em, M. Sc. in Economics
S'
S
DC
QF2 QF1
30
S'
S
E2
0
QC2
QC1
Clothing per Year
Figure 11.11 Multi-market Analysis Incidence
A
B
S' = MC + T
S
S
S'
Price
E2
PG
P*
PN
E1
P
P F'
E1
E2
D
0
31
Q' Q*
Clothing per Year
In Em, M. Sc. in Economics
D
0
Q F Q F'
Food per Year
Government Taxes and Expenditures and the
Distribution of Income
 The Tax Incidence is who bears the burden of a tax.
 The Expenditure Incidence is who receives the benefits of a
government program.
 The Budget Incidence is the net analysis of a program’s tax
and expenditure incidence.
 The Differential Tax Incidence is the change in the tax
incidence that results from substituting one equal yield tax
for another.
32
In Em, M. Sc. in Economics
The Lorenz Curve
 The Lorenz Curve maps the cumulative percentage of
households against their cumulative percentage of
income.
33
In Em, M. Sc. in Economics
Figure 11.12 A Lorenz Curve
E
Percentage of Real Income
100
Line of Equal Distribution
75
50
Area A
25
20
10
5
3
0
34
y
60
In Em, M. Sc. in Economics
Area B
x
10 25
50
75
Percentage of Households
D
100
The Gini Coefficient
 The Gini Coefficient is the ratio of the area between
the Lorenz curve and the perfect equality line (Area A
in the previous slide) to the area under the perfect
equality line (Areas A and B).
35
In Em, M. Sc. in Economics
Effective Tax Rates for All Federal Taxes, 1998
Income Category (in
quintiles)
36
Effective Tax
Rate (percent)
Lowest
4.5
Second
13.3
Third
18.9
Fourth
22.1
Highest
28.7
In Em, M. Sc. in Economics
End of Chapter 6
Thank you!
37
In Em, M. sc. in Economics