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Lecture note Public finance (10th Edition) - Chapter 14: Taxation and income distribution

Chapter 14 summary: Who bears the burden of a tax? It depends on price changes, which, in turn, depend on: Time frame, disposition of tax revenue, market structure, elasticities of supply and demand, mobility of factors of production, tax salience; partial equilibrium incidence and general equilibrium incidence analyses are used to determine burdens of unit and ad-valorem taxes. | TAXATION AND INCOME DISTRIBUTION Chapter 14 Vocabulary Statutory Incidence Economic Incidence Tax Shifting Partial Equilibrium Models 0 14- Tax Analysis – use of economic theory to analyze impact of taxes Equity and Efficiency – how do taxes affect the distribution of income, how do taxes affect economic efficiency Statutory Incidence - who is legally responsible for tax (who writes the check) Economic Incidence – whose purchasing power is reduced by the tax Tax Shifting – extent that statutory and economic incidence differ Partial Equilibrium Models- look at a single market, appropriate when market for commodity is small relative to economy Tax Incidence: General Remarks Only people can bear taxes Functional distribution of income Size distribution of income Both sources and uses of income should be considered Incidence depends on how prices are determined Incidence depends on the disposition of tax revenues Balanced-Budget tax incidence Differential tax incidence . | TAXATION AND INCOME DISTRIBUTION Chapter 14 Vocabulary Statutory Incidence Economic Incidence Tax Shifting Partial Equilibrium Models 0 14- Tax Analysis – use of economic theory to analyze impact of taxes Equity and Efficiency – how do taxes affect the distribution of income, how do taxes affect economic efficiency Statutory Incidence - who is legally responsible for tax (who writes the check) Economic Incidence – whose purchasing power is reduced by the tax Tax Shifting – extent that statutory and economic incidence differ Partial Equilibrium Models- look at a single market, appropriate when market for commodity is small relative to economy Tax Incidence: General Remarks Only people can bear taxes Functional distribution of income Size distribution of income Both sources and uses of income should be considered Incidence depends on how prices are determined Incidence depends on the disposition of tax revenues Balanced-Budget tax incidence Differential tax incidence Lump-sum tax Absolute tax incidence 14- Tax Progressiveness Can Be Measured in Several Ways Average tax rate versus marginal tax rate Proportional tax system Progressive tax system Regressive tax system Tax Liabilities under a hypothetical tax system Income Tax Liability Average Tax Rate Marginal Tax Rate $2,000 -$200 -0.10 0.2 3,000 0 0 0.2 5,000 400 0.08 0.2 10,000 1,400 0.14 0.2 30,000 5,400 0.18 0.2 14- Tax scheme depicted – Tax = 0.20*(Income - $3,000) Measuring How Progressive a Tax System Is 14- Measuring How Progressive a Tax System is – A Numerical Example 14- Partial Equilibrium Models Models that study only one market and ignore possible spillover effects on other markets Economic incidence depends on: Elasticities of Supply and Demand Tax Salience: the extent to which a tax rate is made prominent to a taxpayer Economic incidence does not depend on whether it is levied on Consumers or Producers. 14- Before Tax After Tax Consumers Pay Suppliers .