Tax Incidence: General Remarks Incidence depends on how prices are determined Industry structure matters Short- versus long-run responses
6 Tax Incidence: General Remarks • Incidence depends on how prices are determined – Industry structure matters – Short- versus long-run responses
Tax Incidence: General Remarks Incidence depends on disposition of tax revenue Balanced budget incidence computes the combined effects of levying taxes and government spending financed by those taxes Differential tax incidence compares the incidence of one tax to another, ignoring how the money is spent Often the comparison tax is a lump sum tax -a tax that does not depend on a person's behavior
7 Tax Incidence: General Remarks • Incidence depends on disposition of tax revenue – Balanced budget incidence computes the combined effects of levying taxes and government spending financed by those taxes. – Differential tax incidence compares the incidence of one tax to another, ignoring how the money is spent. • Often the comparison tax is a lump sum tax – a tax that does not depend on a person’s behavior
Tax Incidence: General Remarks Tax progressiveness can be measured in a number of ways a tax is often classified as Progressive Regressive roportional Proportional taxes are straightforward: ratio of taxes to income is constant regardless of income level
8 Tax Incidence: General Remarks • Tax progressiveness can be measured in a number of ways – A tax is often classified as: • Progressive • Regressive • Proportional – Proportional taxes are straightforward: ratio of taxes to income is constant regardless of income level
Tax Incidence: General Remarks Can define progressive(and regressive) taxes in a number of ways Can compute in terms of Average tax rate(ratio of total taxes total income)or Marginal tax rate( tax rate on last dollar of income)
9 Tax Incidence: General Remarks • Can define progressive (and regressive) taxes in a number of ways. • Can compute in terms of – Average tax rate (ratio of total taxes total income) or – Marginal tax rate (tax rate on last dollar of income)
Tax Incidence: General Remarks Measuring how progressive a tax system is present additional difficulties. Consider two simple definitions The first one says that the greater the increase in average tax rates as income rises, the more progressive is the system 000 10
10 Tax Incidence: General Remarks • Measuring how progressive a tax system is present additional difficulties. Consider two simple definitions. – The first one says that the greater the increase in average tax rates as income rises, the more progressive is the system. v I I T I T I 1 1 0 1 1 0 0 = − −