Taxes Flashcards
(30 cards)
What is tax incidence?
How the burden of a a tax is distributed among participants in a market
What is the first impact on a buyer tax of a good?
Supply stays the same, the demand curve shifts to the left
Initially, how much does the effective price for a buyer shift upon the introduction of a 50 cent tax?
the exact price of the tax
What happens to the price of a good in the long-term when there is a buyer tax? why?
The price drops, because demand is lower.
Why does a buyer tax make sellers worse off?
The sellers have to sell at a lower price, and therefore absorb some of the costs of the tax.
What is the effective price received by sellers?
The amount they actually keep after paying taxes: a 50 cent tax on a $2 ice cream would make the effective price $1.50
What is the effect of a seller tax on the price and demand?
The quantity supplied must correspond to the lower, effective price, to correspond with the higher market price which affects demand.
True or false: taxes on buyers and sellers are not equivalent
false. The wedge between the buyer’s price and the seller’s price is the same, regardless of who the tax is levied on. The only difference is who actually sens the money to the government.
What is a payroll tax?
A tax on the wages that firm pay their workers
What is the primary determinant of tax incidence?
Elasticity
What happens when a tax is imposed on a market with high elastic supply compared to demand?
The effective price received by sellers does not decrease much. The price paid by the buyers rises substantially
What happens when a tax is imposed on a market with high elastic demand compared to supply?
The price paid by the buyers does not increase much. The effective price received by sellers decreases substantially.
Why does the elasticity of a market have an effect on the tax incidence?
It measures the willingness of buyers or sellers to leave the market when conditions are unfavourable. Small demand elasticity means buyers do not have good alternatives; vice versa for sellers. The side with less elasticity must therefore take more of the tax, because the price will increase/decrease according to their respective demand/supply.
Why do sellers pay more in a tax when their supply is inelastic relative to demand?
the buyers leave, the demand drops, and so the price does as well.
Why do buyers pay more in a tax when their demand is inelastic relative to supply?
Demand remains the same. The sellers can simply charge the price of the tax.
In a payroll tax, is the supply or demand or labour more elastic. What does this mean. What is the implication for the tax burden?
Supply; it means workers offer their services less elastically than the firms’ demand for them; The tax burden is paid primarily by the workers.
a $1 per unit tax levied on consumers of a good is equivalent to
A price floor that raises the good’s price by $1 per unit.
Which of the following increases quantity supplied, quantity demanded, and decreases the price that consumers pay?
-Passage of.a tax on a good
-repeal of a tax on a good
-imposition of a binding price floor
-removal of a binding price floor
repeal of a tax on a good
Which of the following increases quantity supplied, decreases quantity demanded, and increases the price that consumers pay?
-Passage of.a tax on a good
-repeal of a tax on a good
-imposition of a binding price floor
-removal of a binding price floor
imposition of a binding price floor
What happens to the quantity of goods sold when a tax is transferred to the buyer from the seller?
nothing
In what conditions would a larger payroll tax reduce the burden on workers?
Depending on the elasticity of the workers’ supply of labour. However, it is usually the other way around, and a larger tax increases the wedge, and will increase the pressure on workers.
Would a $500 tax on luxury price increase the price paid by consumers by over $500, $500, or less than $500? Explain.
Usually less, because the burden is shared by buyer and seller. Price paid by sellers increases and price received by buyers decreases, the difference being $500. However, if the supply is perfectly elastic or the demand perfectly inelastic, it would increase exactly by $500 for the buyer.
Calculating the effective price for the seller with a tax is done how?
Price to the buyer + tax
Calculating the tax increase for the seller is done how?
Price to the buyer + tax - original price
