Increasing Returns and Economic Geography © Allen C. Goodman, 2002.
1 Principles of Tax Analysis © Allen C. Goodman, 2009.
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Transcript of 1 Principles of Tax Analysis © Allen C. Goodman, 2009.
2
Lots of Different Taxes
Income/Business Consumption Wealth
Personal Income Sales Property
Corporate Income Use Estate
Value-Added Motor Fuel Inheritance
License Alcoholic Beverage Transfer
Hotel/Motel
Restaurant Meals
Telephone Call
Gambling
Most economistsDon’t like this one.
Why?
3
Lots of Different Taxes
Income/Business Consumption Wealth
Personal Inc. Sales Property
Corporate Inc. Use Estate
Value-Added Motor Fuel Inheritance
License Alcoholic Beverage Transfer
Hotel/Motel
Restaurant Meals
Telephone Call
Gambling
4
Lots of Different Taxes
Income/Business Consumption Wealth
Personal Inc. Sales Property
Corporate Inc. Use Estate
Value-Added Motor Fuel Inheritance
License Alcoholic Beverage Transfer
Hotel/Motel
Restaurant Meals
Telephone Call
GamblingWhy good?Why bad?
5
Tax Incidence
• Who REALLY pays the tax
• If you buy something at the store, you give $ to the clerk, and the store pays $ to the gov’t, but who really pays?
• If you rent an apartment and property taxes in your city rise, what happens to the rent that you pay? Who really pays?
6
Tax Incidence and Burden
• Progressive Tax– Tax Burden/income ↑
as income ↑
• Proportional Tax– Tax Burden/income
is constant as income ↑
• Regressive Tax– Tax Burden/income ↓
as income ↑Income
Tax
7
Progressive Tax
• Progressive Tax– Tax Burden/income ↑
as income ↑– Slope of ray = T/Y– Mgl Tax Rate =
ΔT/ΔY
• Example – Gas Guzzler Tax
• Federal Income TaxIncome
Tax
T
Y
Y1 Y2 Y3
Ave.TaxRate
Mgl.TaxRate
T
ΔT
ΔY
Average Marginal
Ave Ray to origin
Mgl slope
8
Proportional Tax
• Proportional Tax– Tax Burden/income
constant as income ↑– Slope of ray = T/Y– Mgl Tax Rate =
ΔT/ΔY
• Example – Medicare Tax
Income
Tax
Y1 Y2 Y3
T
Y
ΔT
ΔY
Average Marginal
Ave Ray to origin
Mgl slope
9
Regressive Tax
• Regressive Tax– Tax Burden/income ↓
as income ↑– Slope of ray = T/Y– Mgl Tax Rate =
ΔT/ΔY
• Example – FICA tax for Social Security
Income
Tax
Y1Y2 Y3
Mgl.TaxRate
T
Y
ΔT
ΔY
Average Marginal
Ave Ray to origin
Mgl slope
10
FICA and Medicare Taxes
0
1000
2000
3000
4000
5000
6000
7000
0 20000 40000 60000 80000 100000 120000
Payroll Income
Tax
es (
$)
FICA Tax - 2008
FICA Tax - 2009
Medicare Tax
FICA and Medicare
11
General Rules for Taxes
• Only way (legally) to avoid taxes is to change behavior.
• The more that one agent can avoid the tax – the less is collected– the more someone else pays
12
Taxes and Efficiency
• Excise Tax– Tax on a particular
good.– Look at a unit (as
oppose to percentage) tax.
• Partial eq’m analysis looks at a single market.
$
Q
D S
Q0
P0
EfficientQuantity! WHY?
EfficientQuantity! WHY?
13
Taxes and Efficiency
• Excise Tax– Tax on a particular good.– Look at a unit (as oppose to
percentage) tax.• $1 Tax Collected on
DEMANDERS
$
Q
D S
Q0
P0
$1
Why is this treated as a downward shift?
Suppose you buy gasoline at $3.00 per gallon.
Your state imposes a $1.00/gallon tax.
You keep your receipts and pay tax.
You demand based on $2.00 per gallon, because you know you’ll have to pay an additional $1.00. Your demand curve shifts DOWN by $1.00.
3.0
14
Total Revenue
Taxes and Efficiency
• Excise Tax– Tax on a particular
good.– Look at a unit (as
oppose to percentage) tax.
• $1 Tax Collected on DEMANDERS
$
Q
D S
Q0
P0
Who Pays?
P1
Q1
D'
$1
3.0
15
Taxes and Efficiency
• Excise Tax– Tax on a particular
good.– Look at a unit (as
oppose to percentage) tax.
• $1 Tax Collected on DEMANDERS
$
Q
D S
Q0
P0
What’s DW$
P1
Q1
Prod.
Con.DW
$1
3.0
16
Total RevenueProd.
Suppose the $1 is on Suppliers?
$
Q
D S
Q0
P0
• Excise Tax– Tax on a particular
good.– Look at a unit (as
oppose to percentage) tax.
• $1 Tax Collected on SUPPLIERS
Who Pays?
Cons.
EXACTLY the same result.
EXACTLY the same result.
DW
P1
Q1
3.0
17
If result is same …
• Why do we usually collect sales taxes from the sellers?
• Do we ever try to collect it from the buyers?
• What happens when we do?
18
Important Concepts!
• DW loss relates to the change in quantity. Remember, we saw that efficiency related to quantity. The more behavioral change that a tax makes, the more DW loss.
• Incidence relates to elasticity of demand and supply. Remember elasticity addresses whether quantity changes a little or lot. If you can change your behavior a lot, and avoid the tax, its incidence on you is small.
• If you can’t change your behavior and avoid it, its incidence is a lot! Does it matter how we collect the tax?
19
Total (yellow)
Another Gas Tax Example
• Suppose that Southfield puts a $1/gallon tax on gas.
• Let’s look at demand and supply.
• Why did I draw demand and supply like I did.
$
Quantity
D
S
Who Pays?
Q0
$1
P0
P1
Q1
Price ↑ a little;Quantity ↓ a lotMost is paid by
producers.
S'
Consumer
by producer
20
TaxCollected
Another Gas Tax Example
• Suppose that the US puts a $1/gallon tax on gas.
• Let’s look at demand and supply.
• Why did I draw demand and supply like I did.
$
Quantity
D
S
Who Pays?
Q0
$1
P0
P1
Q1
Price ↑ a lot;Quantity ↓ a littleMost is paid by
consumers.
S'
WHY?
21
Excess Burden – Gen’l Eq’m
• Previously, we looked only at a single market. Even if a tax doesn’t change quantity in a given market it may change behavior in other markets. U0
U1
U2
• We can’t measure U1 – U2, but we CAN, in principle, measure the cost in $ of this excess burden.
Gasoline
Other Goods
Excess Burden
22
Even if Q doesn’t change! – Gen’l Eq’m
• Previously, we looked only at a single market. Even if a tax doesn’t change quantity in a given market (again, suppose it’s gasoline) it may change behavior in other markets. U0
U1
U2
• Again we can’t measure U1 – U2, but we CAN, in principle, measure the cost in $ of this excess burden, even though the amount of gas did not change.
Gasoline
Other Goods
24
What has been happening
• Over time, the share of output generated from the relatively less cyclically sensitive service-producing industries has risen modestly in comparison with relatively larger cyclically sensitive goods-producing industries.
• So, as the share of services has risen the share (and possibly the amount) of goods-based sales taxes has fallen.
25
Sources of State Revenues
• Go to Spreadsheet
All States
http://www.census.gov/compendia/statab/cats/state_local_govt_finances_employment/state_government_finances.html
26
Where does Michigan stand?
• Go to Spreadsheet.
http://www.census.gov/compendia/statab/cats/state_local_govt_finances_employment/state_government_finances.html
27
Total Sales
Short-Run and Long-Run Impacts
• Look at SR supply elasticities?
• Look at SR demand elasticities?
• What is impact of 6% tax on services?
D S$
Quantity
S'
Why drawn like this?
Why drawn like this?
Total Tax Rev.P1
Q1Q2
P2
DW is small
28
Tot Sales
Long-Run Impacts
• Look at LR supply elasticities?
• Look at LR demand elasticities?
• What is impact of 6% tax on services?
D S$
Quantity
S'
Supply more elastic
Supply more elastic
Tot. Tax Rev.P1
Q1Q2
P2
S''
D''
Demand more elastic
Demand more elastic
29
Tot Sales
Long-Run Impacts
• What is net impact as drawn?
• P3 < P2 because demand is more elastic
• TR? Depends on whether price ↑ (leading to ↑ in tax per unit) by greater % than quantity ↓.
D S$
Quantity
S'
Tot. Tax Rev.P1
Q1Q2
P2
S''
D''
P3
Q3
New Tax Rev.
30
A Model of a Michigan Service Tax
1 = goods produced nationally– examples?
2 = goods produced locally – examples?
T = Taxes Collected by MichiganT = National sector taxes + Local Sector taxes
T = t1 p1 Q1 (t1, t2, p1, p2, y) + t2 p2 Q2 (t1, t2, p1, p2, y)
y = p1 Q1 + p2 Q2
+ -
-+ +
What happens if we establish (increase) taxeson local goods, services?
31
• Lots of things happen!!
• Prices of local goods , in quantity demanded of local goods.
in demand for national goods.
• What will be the TAX IMPACT and who will pay it?
What will the Full Impact of a tax on local goods be?
32
dT/dt2 = p2 Q2 + t2 p2 (dQ2/dt2) + t2 p2 (dQ2/dp2 ) (dp2/dt2 ) + t1 p1 (dQ1/dt2 )
What will the Full Impact of a tax on local goods be?
Less Sold! But itIs now taxed.
Higher prices,Less sold.
More taxes onSubstitutes.
33
dT/dt2 = p2 Q2 + t2 p2 (dQ2/dt2) + t2 p2 (dQ2/dp2 ) (dp2/dt2 ) + t1 p1 (dQ1/dt2 )
dT/dt2 = p2 Q2 + t2 (dQ2/dt2 ) (Q2/Q2) p2 + (Q2/Q2)(p2/p2) t2 p2 (dQ2/dp2 ) (dp2/dt2 ) + (t2/t2) (Q1/Q1) t1 p1 (dQ1/dt2)
dT/dt2 = p2 Q2 + dQ2/dt2 (t2 /Q2) (p2 Q2) + p2 Q2 [(dQ2/dp2) (p2/Q2)] [(dp2/dt2) (t2/p2)] + (t1/t2)(p1Q1) (dQ1/dt2) (t2/Q1)
dT/dt2 = p2 Q2 + Elas Q2t2 (p2 Q2) + p2 Q2 (Elas Q2p2) (Elas p2t2) + (t1/t2)(p1Q1) (Elas Q1t2)
dT/dt2 = p2 Q2 (1 + Elas Q2t2 + Elas Q2p2 Elas p2t2)+ p1Q1 (t1/t2) (Elas Q1t2)
What will the Full Impact of a tax on local goods be?
34
dT/dt2 = p2 Q2 (1 + Elas Q2t2 + Elas Q2p2 Elas p2t2)+
p1Q1 (t1/t2) (Elas Q1t2)
A Model of the Service Tax+ or - ? + or - ? + or - ?
+ or - ?
KEY POINT --- There are LOTS of Impacts!
35
dT/dt2 = p2 Q2 (1 + Elas Q2t2 + Elas Q2p2 Elas p2t2)+ p1Q1
(t1/t2) (Elas Q1t2)
0.06* (dT/dt2) = 0.06 * p2 Q2 (1 + Elas Q2t2 + Elas Q2p2
Elas p2t2)+ 0.06 * t1p1Q1 (Elas Q1t2)
Elas Tt2 = s2 (1 + Elas Q2t2 + Elas Q2p2 Elas p2t2) + s1 *
Elas Q1t2 ; s1 = t1p1Q1/T; s2 = t2p2Q2/T.
A 6% Service Taxt2 = 0.06
This is a one UNIT
in tax. We want 0.06 of that.
36
dT/dt2 = p2 Q2 (1 + Elas Q2t2 + Elas Q2p2 Elas p2t2)+ p1Q1
(t1/t2) (Elas Q1t2)
0.06* (dT/dt2) = 0.06 * p2 Q2 (1 + Elas Q2t2 + Elas Q2p2
Elas p2t2)+ 0.06 * p1Q1 (t1) (Elas Q1t2)
Elas Tt2 = s2 (1 + Elas Q2t2 + Elas Q2p2 Elas p2t2) + s1 *
Elas Q1t2 ; s1 = t1p1Q1/T; s2 = t2p2Q2/T.
A 6% Service Taxt2 = 0.06
6% of original sales of Q2
Change in sales of Q1