Price
S1 S
PS
P1 PC
D
Q2 Q1
Brothel Transactions
2. No, it does not follow that the tax will be progressive. If both lose the same amount of utility, the rich person will pay more because of diminishing marginal utility of income. But, a progressive tax requires that a higher proportion of income (the average tax rate) be taken from the rich person. This tax plan only requires that the absolute amount be higher, not the proportional amount. For instance, if the marginal utility were decreasing, but very close to constant, then the rich and poor would pay very close to the same amount in taxes. This amount would be a much larger share of the poor person’s income.
4. Conclusions
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Chapter 14 – Taxation and Income Distribers to End of Chapter Questions
1. The market initially is at P1Q1. Adding a per-customer tax on strip clubs would be a tax on a commodity. Because the producer would be paying the tax, the effective supply curve for suppliers would be S1. The producers are happy and the market clears only when PS is paid by the customers for quantity Q2. Of this price, PS-PC is the tax paid, where customers pay PS-P1 of the tax and the suppliers pay P1-PC. The incidence depends on the relative elasticities of supply and demand. Here, the curves are drawn such that the consumers and suppliers face roughly the same incidence. However, if one believed that the supply was relatively more inelastic, then the strip clubs would face a higher incidence.
2. Partial Equilibrium Models a. Unit Taxes on Commodities b. Ad Valorem Taxes c. Taxes on Factors d. Commodity Taxation without Competition e. Profits Taxes f. Tax Incidence and Capitalization
3. General Equilibrium Models a. Tax Equivalence Relations b. The Harberger Model c. Analysis of Various Taxes d. Some Qualifications e. An Applied Incidence Study
Part 4 – A Framework for Tax Analysis
Chapter 14 – Taxation and Income Distribution Brief Outline
1. Tax Incidence: General Remarks a. Only People Can Bear Taxes b. Both Sources and Uses of Income Should Be Considered c. Incidence Depends on How Prices are Determined d. Incidence Depends on the Disposition of Tax Revenues e. Tax Progressiveness Can Be Measured in Several Ways
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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.