Lesson 9 (+ a bit of 10) Flashcards
(16 cards)
meaning lump sum tax
= a tax whose value is independent of the individiual’s behavior (fixed amount for everybody, based on “nothing”)
meaning unit tax
= tax of a fixed amount per unit of commodity
meaning ad valorem tax
= tax computed as a percentage of the purchase value (% of product)
how does a graph look like when you impose an ad valorem tax on consumers?
3 lines:
- A normal downward-sloping demand curve
- An upward-sloping supply curve
- New demand line: with vertical gap between what buyers pay and what sellers receive, caused by the tax (more elastic + below demand line)
payroll taxes: 50% employer and 50% by consumer, but why is this not fair?
graph= There’s:
- A downward-sloping demand curve (employers’ willingness to hire at each wage) –> elastic
- An upward-sloping supply curve (workers’ willingness to work at each wage) –> inelastic, because:
1. Workers need to work to earn a living.
2. Especially in the short run, they can’t easily reduce hours or quit their job if the wage drops slightly.
conclusion: with tax, price goes up and workers are the one’s who will pay the most
capital taxation in a graph
draw graph, new price to the left, depending on elasticity, the consumer or producers pays the most for the new price
what happens in a monopoly with the price, adding a tax?
- The monopolist reduces output further than before (less than under perfect competition).
- Price increases more than in a competitive market.
- Consumers face higher prices, and quantity falls.
- The monopolist may absorb some of the tax, but passes most of it to consumers if demand is inelastic.
- There’s still deadweight loss — and it gets worse because monopolies already underproduce.
what happens in a oligopoly with the price, adding a tax?
we have no idea!
depends on how prices change, and there are many theories on price determination under oligopoly
instead of taxing a commodity, what if we directly tax economic profits of a firm?
- no possible tax shifting
- because the optimal quantity and price stays the same
- not used often, because operationally very difficult
what happens if we impose a unit tax on land?
Land is unique because it’s fixed in supply and is durable
–> tax announced
–> tax incorporated in the price
–> so, price of land goes down by the present value of all future tax payments (=capitalization)
–> future owners pay the tax, but aren’t the burden
BECAUSE: the land become cheaper the moment the tax was announced (old landowner at tax implementation pays all the cost)
meaning excess burden
(welfare loss, deadweight loss –> same concept)
= associated with a tax, relative to a lump sum tax
excess burden= a loss of welfare above and beyond taxes collected
difference between bread (inelastic) and substitute, like corn
bread –> doesn’t change for demand, it is needed for everyone
corn –> does change for demand
if lump sum taxes are so efficient, why don’t governments use them?
- most people consider strict lump sum taxes unfair, because they hurt the poor disproportionately
–> what about one that varies with income level?
–> has implications for labor market
solution: base on some underlying trait that can’t be altered, but is correlated with income (person’s height for example)
example of how one market affects another one
increase tax rate cigarettes –> quantity decreases –> demand decreases –> tabacco farmers witch to another product, say cotton –> these farmers switch –> price drops –> harms current cotton farmers
meaning theory of second best
in the presence of existing distortions, policies that in isolation would crease efficiency, can also increase it (or other way around)
= If a market has multiple distortions (e.g. externalities, taxes, monopolies),
And you can’t remove all of them, then removing or correcting just one might lead to a worse outcome.
meaning double-dividend effect
= If you tax something harmful (like pollution), you can get two benefits (“dividends”)
example: when we tax pollution
1. environmental impact
2. removal of distortions: inefficient tax rates
