Tax Incidence: General Remarks The second one says a tax system is more progressive if its elasticity of tax revenues with respect to income is higher Recall that an elasticity is defined in terms of percent change in one variable with respect to percent change in another one. 0△T (G1-x) 0 0△
11 Tax Incidence: General Remarks – The second one says a tax system is more progressive if its elasticity of tax revenues with respect to income is higher. – Recall that an elasticity is defined in terms of percent change in one variable with respect to percent change in another one: ( ) ( ) v T I T T T I I I 2 1 0 0 1 0 0 = = − − % %
Tax Incidence: General Remarks These two measures both of which make intuitive sense, may lead to different answers EXample: increasing all taxpayers liability by20% 12
12 Tax Incidence: General Remarks • These two measures, both of which make intuitive sense, may lead to different answers. • Example: increasing all taxpayer’s liability by 20%
Partial Equilibrium Models Partial equilibrium models only examine the market in which the tax is imposed and ignores other markets Most appropriate when the taxed commodity is small relative to the economy as a whole 13
13 Partial Equilibrium Models • Partial equilibrium models only examine the market in which the tax is imposed, and ignores other markets. • Most appropriate when the taxed commodity is small relative to the economy as a whole
Partial Equilibrium Models Per-unit taxes Unit taxes are levied as a fixed amount per unit of commodity sold Federal tax on cigarettes, for example, is 39 cents per pack Assume perfect competition. Then the initial equilibrium is determined as( Qo, Po) in Figure 12. 1 14
14 Partial Equilibrium Models: Per-unit taxes • Unit taxes are levied as a fixed amount per unit of commodity sold – Federal tax on cigarettes, for example, is 39 cents per pack. • Assume perfect competition. Then the initial equilibrium is determined as (Q0 , P0 ) in Figure 12.1
Figure 12.1 目 Pc D Q Gallons of champagne per year
Figure 12.1