14-2
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
14-3
Tax Progressiveness Can Be Measured in Several Ways
$2,000 -$200 -0.10
0.2
Progressive tax system 3,000 0
0
0.2
Regressive tax system 5,000 400
0.08
0.2
10,000 1,400
0.14
0.2
30,000 5,400
0.18
0.2
14-4
Measuring How Progressive a Tax System is
Ad Valorem Taxes
Price per Pound of food
Sf Pr
P0
Pm
Df Df’
Qr
Q0
Qm
Pounds of food
per year
14-10
Taxes on Factors
The Payroll Tax Capital Taxation in a Global Economy
200 800
1000 800
v2
T1 T0 T0
I1 I0 I0
300 200
2.0 200 1000 800 800
360
.0003 1000

240 800
1000 800
360 240
2.0 240 1000 800 800 14-6
$
2.60
Partial Equilibrium Models
v1

T1 I1

T0 I0
I1 I0
T1 T0
v T0
2
I1 I0
I0
14-5
Measuring How Progressive a Tax System is – A Numerical Example
v1

T1 I1

T0 I0
I1 I0
300
.00025 1000

14-11
Commodity Taxation without Competition
Monopoly Oligopoly
14-12
Profits Taxes
Economic profit Perfect competition Monopoly Measuring economic profit
2.40 2.20
2.00 1.80
Consumers Pay Suppliers Receive
Before Tax After Tax
$1.20 $1.20
S1
$1.40 $1.00
S0
1.60
1.40
1.20
1.00
0.80
0.60
D0
0
1
2
3
4
5
6 D1
7 Quan1ti4t-y78
$
2.6
u0 + u1/(1 + r) + u2/(1 + r)2 + … + uT/(1 + r)T Capitalization
14-14
General Equilibrium Models
Partial equilibrium General equilibrium
14-15
Tax Equivalence Relations
tKF = a tax on capital used in the production of food tKM = a tax on capital used in the production of manufactures tLF = a tax on labor used in the production of food tLM = a tax on labor used in the production of manufactures tF = a tax on the consumption of food tM = a tax on consumption of manufactures tK = a tax on capital in both sectors tL = a tax on labor in both sectors t = a general income tax
SX
2.4
2.2
2
S
1.8
1.6
1.4
1.2
1
Perfectly
0.8
InSeulpapsltDyicX’
DX
0.6
0
1
2
3
4
5
6
7 Quan1ti4t-y88
$
2.6
2.4
2.2
2
S
1.8
1.6
Perfectly
1.4
Elastic
Supply
SX
1.2
1
0ห้องสมุดไป่ตู้8
DX’
DX
0.6
0
1
2
3
4
5
6
7 Quan1ti4t-y98
CHAPTER 14
TAXATION AND INCOME
DISTRIBUTION
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Vocabulary
Statutory Incidence Economic Incidence Tax Shifting Partial Equilibrium Models
Average tax rate versus Tax Liabilities under a hypothetical tax
marginal tax rate
system
Income Tax Average Marginal
Proportional tax system
Liability Tax Rate Tax Rate
14-13
Tax Incidence and Capitalization
PR = $R0 + $R1/(1 + r) + $R2/(1 + r)2 + … + $RT/(1 + r)T
PR’ = $(R0 – u0) + $(R1 – u1)/(1 + r) + $(R2 – u2)/(1 + r)2 + … + $(RT – uT)/(1 + r)