Tax Incidence Tax Incidence
Dec 26, 2015
Tax IncidenceTax Incidence
Categories of TaxesCategories of Taxes• Regressive Taxes: tax the
poor more than the rich, in terms of percentage of income (e.g., sales tax)
• Progressive taxes: tax the rich more than the poor, in terms of percentage of income (e.g., a graduated income tax)
• Proportional tax: taxes the same percentage, regardless of income (“flat tax”)
• Received benefit taxes: tax only those people who benefit from the service (e.g., road tax charged to car owners for vehicle licenses)
• Taxes to address market failure or discourage purchase of demerit goods
Types of TaxesTypes of Taxes• Personal Income Taxes
– Tax on calculated income– Taxable income calculated sources of
income and deductions– In US, most sources of income mail
annual statements to citizens (W2, 1099 forms etc.)
– Marginal rates increase with income• Property Taxes
– Typically local taxes levied on assessed value
– Typically seen as progressive, because most poor do not own property
• Sales Taxes– Fixed percentage on sales. In US,
local and state.– Regressive because poor pay large
percentage of income.• Excise Taxes
– Imposed on specific items, often to discourage consumption
– Payroll taxes fund Social Security and Medicare
Tax IncidenceTax Incidence
• For sales and excise tax, key question: when tax is applied, who will pay it?
• If producers pass entire tax on to consumers, consumers may stop buying product
• If producers pay all tax, producers may stop producing product
• Elasticity of S & D shows us the compromise
Tax Incidence AnalysisTax Incidence Analysis• Elasticity of S & D determine
tax incidence• Determine tax incidence by
– Placing vertical line equal to tax amount as wedge into S&D
– Noting resulting change in P
– If ΔP > half of tax, the most of tax falls on consumer
– If ΔP < half of tax, the most of tax falls on supplier
• Elastic S places greater incidence on consumer
• Elastic D places greater incidence on seller