Transcript Tax Incidence: Partial Equilibrium

Tax Incidence:
Partial Equilibrium
Anderson: Equity Aspects of Taxes and Expenditures
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.
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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.
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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.
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The Concept of Incidence
• Economic incidence
• Economic vs. statutory incidence
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Figure 12.1: Effect of a Unit Tax on Demand
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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.
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Figure 12.2: Incidence of a Unit Tax Applied to Consumers
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Figure 12.3: The Effect of a Unit Tax on Supply
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Figure 12.4: Incidence of a Unit Tax Applied to Producers
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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.
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Figure 12.5: Effect of an Ad Valorem Tax on Supply
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Figure 12.6: Incidence of an Ad Valorem Tax Applied to Producers
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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.
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Figure 12.7: The Incidence of a Unit Tax Depends on the Elasticity of Demand
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Figure 12.8: The Incidence of a Unit Tax Depends on the Elasticity of Supply
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