Promoting active learning

1
The Incidence of Taxation
2
The incidence of taxation

• Indirect taxes

3
Effect of a tax on the supply curve
P
S
Q
O
4
Effect of a tax on the supply curve
P
S specific tax
S
Q
O
5
Effect of a tax on the supply curve
P
S
Q
O
6
The incidence of taxation

• Effect of indirect taxes on market price
• and quantity

7
Effect of a tax on price and quantity
P
S
P1
D
Q1
Q
O
8
Effect of a tax on price and quantity
P
S tax
S
P2
P1
D
Q2
Q1
Q
O
9
The incidence of taxation

• The incidence of indirect taxes effects of
  different demand and supply elasticities

10
Incidence of tax inelastic demand
P
S
P1
D
Q1
O
Q
11
Incidence of tax inelastic demand
P
S tax
P2
S
P1
D
Q1
O
Q
12
Incidence of tax inelastic demand
P
S tax
P2
S
CONSUMERS SHARE
P1
D
Q2
Q1
O
Q
13
Incidence of tax elastic demand
P
S tax
S
P1
D
Q1
O
Q
14
Incidence of tax elastic demand
P
S tax
S
P2
P1
D
Q1
O
Q
15
Incidence of tax elastic demand
P
S tax
S
P2
CONSUMERS SHARE
P1
D
Q2
Q1
O
Q
16
Incidence of tax elastic demand
P
S tax
S
P2
CONSUMERS SHARE
P1
D
PRODUCERS SHARE
P2 - t
Q2
Q1
O
Q
17
Incidence of tax inelastic supply
P
S tax
S
P1
D
Q1
O
Q
18
Incidence of tax inelastic supply
P
S tax
S
P2
P1
D
Q1
O
Q
19
Incidence of tax inelastic supply
P
S tax
S
P2
CONSUMERS SHARE
P1
D
Q2
Q1
O
Q
20
Incidence of tax inelastic supply
P
S tax
S
P2
CONSUMERS SHARE
P1
PRODUCERS SHARE
D
P2 - t
Q2
Q1
O
Q
21
Incidence of tax elastic supply
P
S tax
S
P1
D
Q1
O
Q
22
Incidence of tax elastic supply
P
S tax
P2
S
P1
D
Q1
O
Q
23
Incidence of tax elastic supply
P
S tax
P2
S
CONSUMERS SHARE
P1
D
Q2
Q1
O
Q
24
Incidence of tax elastic supply
P
S tax
P2
S
CONSUMERS SHARE
P1
PRODUCERS SHARE
P2 - t
D
Q2
Q1
O
Q
25
(No Transcript)
26
The incidence of taxation

• Deadweight welfare loss from
• an indirect tax

27
Deadweight loss from an indirect tax

Before-tax situation
S
P1
D
O
Q1
Q
28
Deadweight loss from an indirect tax

Before-tax situation
S
Consumer surplus
P1
D
O
Q1
Q
29
Deadweight loss from an indirect tax

Before-tax situation
S
Consumer surplus
P1
Producer surplus
D
O
Q1
Q
30
Deadweight loss from an indirect tax

S
P1
D
O
Q1
Q
31
Deadweight loss from an indirect tax

S tax
S
1
P2
2
3
P1
5
4
P2 - tax
6
D
O
Q1
Q2
Q
32
Deadweight loss from an indirect tax

S tax
S
1
P2
2
3
P1
5
4
P2 - tax
6
D
O
Q1
Q2
Q
33
Deadweight loss from an indirect tax

S tax
S
1
P2
2
3
P1
5
4
P2 - tax
6
D
O
Q1
Q2
Q
34
Deadweight loss from an indirect tax

S tax
S
1
P2
2
3
P1
5
4
P2 - tax
6
D
O
Q1
Q2
Q
35
Deadweight loss from an indirect tax

S tax
S
1
P2
2
3
P1
5
4
P2 - tax
6
D
O
Q1
Q2
Q
36
The incidence of taxation

• Using taxes to correct
• a market distortion

37
Using taxes to correct a market distortion
(first-best world)
Costs and benefits
O
Quantity
38
Using taxes to correct a market distortion
(first-best world)
MSC
MC S
Costs and benefits
D
P
O
Q1
Quantity
39
Using taxes to correct a market distortion
(first-best world)
MSC
MC S
Costs and benefits
P
D
O
Q1
Quantity
40
Using subsidies to correct a market distortion
(first-best world)
MC S
Costs and benefits
D
P
O
Q1
Quantity
41
Using subsidies to correct a market distortion
(first-best world)
MC S
MSC
Costs and benefits
D
P
O
Quantity
42
Using subsidies to correct a market distortion
(first-best world)
MC S
MSC
Costs and benefits
P
D
O
Q2
Q1
Quantity
43
The incidence of taxation

• Using a lump-sum tax
• to reduce
• monopoly profits

44
Using a lump-sum tax to reduce monopoly profits

MC
P AR
AR MSB
MR
O
Q1
Q
45
Using a lump-sum tax to reduce monopoly profits

MC
AC
P AR
AC
AR MSB
MR
O
Q1
Q
46
Using a lump-sum tax to reduce monopoly profits

MC
AC
P1
AC
AR MSB
MR
O
Q1
Q
47
The incidence of taxation

• Direct taxes

48
Different types of tax (a) total tax paid
Total tax paid (T)
O
Total income (Y)
49
Different types of tax (b) average tax paid
Average tax paid (T/Y)
O
Total income (Y)
50
The incidence of taxation

• Income taxes
• in the UK

51
UK average and marginal rates of income tax for a
single person 2002/3
Marginal rate
40
Tax rate ()
22
10
O
4615
6535
34 515 ( 4615 29 900)
Individuals pre-tax income ()
52
UK average and marginal rates of income tax for a
single person 2002/3
Marginal rate
40
Tax rate ()
22
Average rate
10
O
4615
6535
34 515 ( 4615 29 900)
Individuals pre-tax income ()
53
The incidence of taxation

• Incidence of an
• income tax

54
Incidence of an income tax elastic supply of
labour
S
Wage rate
W1
D
O
Q1
Quantity of labour
55
Incidence of an income tax elastic supply of
labour
S tax
S
Wage rate
W1
D
O
Q1
Quantity of labour
56
Incidence of an income tax elastic supply of
labour
S tax
S
Wage rate
W2
W1
D
O
Q2
Q1
Quantity of labour
57
Incidence of an income tax elastic supply of
labour
S tax
S
Wage rate
W2
W1
W2 - tax
D
O
Q2
Q1
Quantity of labour
58
Incidence of an income tax elastic supply of
labour
S tax
S
Wage rate
W2
W1
A
W2 - tax
D
O
Q2
Q1
Quantity of labour
59
Incidence of an income tax elastic supply of
labour
S tax
S
Wage rate
W2
B
W1
A
W2 - tax
A worker share of tax
D
O
Q2
Q1
Quantity of labour
60
Incidence of an income tax inelastic supply of
labour
S
Wage rate
W1
D
O
Quantity of labour
61
Incidence of an income tax inelastic supply of
labour
S tax
S
Wage rate
W2
W1
D
O
Q1
Quantity of labour
62
Incidence of an income tax inelastic supply of
labour
S tax
S
Wage rate
W2
W1
W2 - tax
D
O
Q2
Q1
Quantity of labour
63
Incidence of an income tax inelastic supply of
labour
S tax
S
Wage rate
W2
W1
A
W2 - tax
D
O
Q2
Q1
Quantity of labour
64
Incidence of an income tax inelastic supply of
labour
S tax
S
Wage rate
W2
B
W1
A
A worker share of tax
W2 - tax
D
O
Q2
Q1
Quantity of labour
65
(No Transcript)
66
The incidence of taxation

• The Laffer curve

67
A Laffer curve
Total tax revenue
0
100
Average tax rate ()
68
A Laffer curve
Total tax revenue
0
100
Average tax rate ()