TAXATION

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TAXATION
By Chan Mei Shan(9) Lee Wing Kam(17)
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Classification of taxes

• Proportional Tax income ? ? tax rate is the
  same
• Regressive Tax income ? ? tax rate ?
• Progressive Tax income ? ? tax rate ?

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Classification of taxes

• Direct Tax- e.g. income tax- levied directly
  on individual taxpayers- tax burden cannot be
  shifted- can be progressive or proportional
• Indirect tax- e.g. sales tax- tax levied on
  activities of individuals or on goods
  services- tax burden can be shifted it is
  always regressive in nature- 2 types per unit
  tax ad Valorem tax ( rate on the value of the
  item)

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• Tax burdenThe amount of money one would have
  to be given to make one just as well off with the
  tax as one was without it.
• Excess burdenThe burden of tax in excess of
  the tax payment.I.e. Tax burden tax payment

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• Taxes have distributional allocational effects
• Transfers the income form the people to the
  government.
• Peoples income is redistributed.
• The tax one pays is not a cost to society.
• Taxes affect resources allocation this imposes
  costs on society.
• Therefore, only the allocational effects will
  result in losses to society.
• Lump-sum tax has minimal allocational effect.

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Taxes imposed on price taker's market
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Lump-sum Tax
S2
MC
S1
AC2
P2
P2AR2MR2
P1
P1AR1MR1
AC1
D
Q1
Q1
Q2
Q2

• S fall, P increase, market output fall.
• AC increase, MC unchanged since lump-sun tax is
  not affected the marginal cost.
• The marginal firm / some other firms whose AC2 is
  now higher than P2 will quit. Therefore, no. of
  firms will reduce.
• However, as the P rises, each of the surviving
  firms will expand output.

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Per-Unit Tax
S2
MC2
MC1
S1
AC2
P2
P2AR2MR2
P1
P1AR1MR1
AC1
D
Q1
Q2
Q2
Q1

• S fall, P increase, market output fall.
• AC MC increase.
• The marginal firm / some other firms whose AC2 is
  now higher than P2 will quit. Therefore, no. of
  firms will reduce.
• The surviving firms may not produce more because
  their MC are higher than before.

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The imposition of tax on a price searcher
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What do you think if HK is imposed a sale tax?
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P
P
S2(MCtax)
S1(MC)
S1(MC)
12
A
10
10
8
D(MUV)
D(MUV)
Q
10
Q
10
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Deadweight loss

• Sales tax led the supply increased from S1 to S2.
• No change for the factor prices in the Q of
  resources used for production. So, MC did not
  change.
• P rises to 12 Q reduces to 8 units.
• MUV gt MC, deadweight loss exist.

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QUESTION
A per-unit tax imposed on cigarettes will tend to
generate which of the following effects? A. The
quality of cigarettes will improve B. The length
of cigarettes will increase C. Cigarettes will be
sold by piece,not by package D. A and B
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D
Usually, only some characteristics of a good is
subjected to taxation. Thus,there will be
substitution of taxation characteristics by
non-tax characteristics to decrease the tax
liability.
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It is the end of our presentation!!! Thank
you!!!!!!!!!!!!!!!