Chapter 12 Taxation and Income Distribution
I. Impact of taxes on income distribution hard to determine because of tax incidence
II. Tax Incidence
a. Who actually pays a tax
b. Legal Incidence – who is legally responsible for paying a tax
c. Economic Incidence – who actually pays the tax
d. Example – tax of $1 is placed on $10 item how is income distribution affected
i. Price stays at $10 – income of seller reduced ii. Prices rises to $11 – income of buyers reduced iii. Price rises to $10.30 – buyers pay $.30 and sellers pay $.70
e. To the extent taxes affect quantity sold and produced, tax affects income of suppliers of inputs for the product.
i. Example: tax on gasoline reduces gasoline consumption it reduces income of gasoline tanker truck owners and drivers.
ii. May reduce the income of furnace manufactures by reducing the price of heating fuel.
III. Tax Incidence Perspectives
a. People pay taxes not corporations
b. How to group people for purposes of tax incidence
i. Often think of producers and consumers
1. But consumers are also producers and producers are also consumers
2. 50 of households own stock directly, others own stock indirectly
ii. By income Rich, Middle Class, Poor
1. How do you define these categories?
c. Tax affect both suppliers of inputs and consumers of a product.
i. In practice tend to ignore one side and do analysis on the other
1. Tax in commodity ignore impacts on inputs
2. Tax on inputs, ignore impact on consumers
d. Incidence depends on how prices are determined
i. How taxes change prices determine who pays the taxes
ii. Amount of time is important – more time more adjustment to taxes
e. Tax incidence depends on how tax revenues are spend
f. Progressiveness of tax system
i. Policy says tax system should be progressive.
ii. Higher income pay a higher percentage of taxes
1. Usually measured as increase in average tax rate taxes/income
2. Exemptions, deductions and marginal rate structure affect average tax rate
iii. 2 measures
1. Percentage change in tax rate divided by percentage change in income
2. Percentage change in taxes divided by the percentage change in income
3. Measures can produce different results
IV. Partial Equilibrium Models of Tax Incidence
a. Analyzes impact of tax on the market in which tax was imposed
b. Ignore impact of market change on other markets
i. Appropriate if tax is small
ii. Appropriate if market is small
iii. Otherwise need general equilibrium analysis
c. Tax incidence of a unit tax – tax per unit of the good
i. Legal incidence on buyers – figure 12.2
1. Tax reduces the demand curve for the product from the supplier’s point of view since at each price the consumer buys less of the product.
ii. Legal incidence on seller – figure 12.3
1. Tax reduces the supply curve for the product from the consumer’s point of view since at each price the suppliers supply less of the product
iii. Economic incidence is independent of legal incidence
1. Arrive at same Price, Quantity, and tax split regardless of whether tax is on producer or supplier....
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