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MGEA02H3 Lecture Notes - Lecture 4: Tax Wedge, Demand Curve, Tax Incidence

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School
UTSC
Department
Economics for Management Studies
Course
MGEA02H3
Professor
Jack Parkinson

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MGEA02H3 Full Course Notes
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Document Summary

Taxation and elasticity, economic incidence of a tax, In general, the answer to this question (surprisingly) is no. To economists, the term tax incidence refers to how much of a tax, in true economic terms, is paid by different economic groups (i. e. , who bears the burden of the tax?). Economists believe the economic incidence of the tax is independent of the statutory incidence of the tax (statutory incidence means which group is required by law to provide the tax money to the government ). The effect of the tax is to raise the supply curve everywhere exactly by x dollars, as shown in the diagram below. To see this, suppose you are given the following supply curve. Now, if the government imposes a tax of . 00 on each unit sold, to be paid by the sellers to the government, the supply curve must become:

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Related Questions

1) Which of the following explains the distribution of income?

Select one:

a. a positive externality

b. The person on which the final burden of a tax falls

c. An unintended result of taxation

d. The way that income is allocated to individuals, families, and other groups

2)Why can suppliers of goods can more easily shift the incidence of a tax to the consumer if the demand of the good is inelastic?

Select one:

a. Because markets that sell inelastic goods have so much competition, that a tax increase would not be noticed.

b. Because the tax would make marginal utility equal marginal benefit.

c. When taxes are levied, companies legally have to increase their prices.

d. Because the consumer needs the good regardless of the new price.

3)Where is the power to issue taxes granted to the federal government?

Select one:

a. The sixteenth amendment to the constitution

b. The bill or rights

c. The 20th amendment to the constitution

d. The declaration of independence

4)

What are intergovernmental revenues generally used to do?

Select one:

a. Sanitation workers’ benefits

b. To create national parks

c. Educate and provide public welfare

d. Provide public transportation for all state employees

5)

One of the noted advantages of a flat tax is

Select one:

a. all members of congress generally agree with issuing a flat tax

b. The flat tax offers a relatively simple tax process

c. There is a defined and agreed upon tax rate already in place.

d. The flat tax removes behavior incentives that are built into the tax code

6) Which of the following is TRUE regarding the “incidence of a tax”.

Select one:

a. This is a tax paid by all people to establish social security payments

b. This refers to the individual(s) who take the final burden of the tax

c. This is a loophole designed to help the rich

d. This is a tax on individuals who run oligopolies

7)

Person “A” earns $10,000 a year and pays 10% of his income in taxes. Person “B” earns $60,000 a year and pays 20% in taxes. Which kind of tax is being represented?

Select one:

a. A regressive tax

b. A progressive tax

c. A loophole tax

d. A flat tax

46. In a proportional income tax system,

marginal tax rates increase as the level of taxable income increases.

marginal tax rates are the same regardless of the level of taxable income.

everyone pays the same dollar amount in taxes.

marginal tax rates decline as the level of taxable income declines.

47 A tax system that applies a lower marginal tax rate at higher levels of income is

backward.

regressive.

progressive.

proportional.

48 The average tax rate can be calculated by which of the following formulas?

The change in taxes due divided by the change in taxable income

The change in taxable income divided by the change in taxes due

Total taxable income divided by total taxes due

Total taxes due divided by total taxable income

49 Under a progressive income tax system, the marginal income tax rate paid by taxpayers

declines as their incomes increase

. is unrelated to their incomes.

rises as their incomes increase.

is unchanged as their incomes increase.

50 The tax base is the minimum amount of tax revenue that government must collect each year.

the maximum amount of tax revenue that government must collect each year.

the sum of all incomes earned in the United States.

the value of all goods, services, incomes, or wealth subject to taxation.

51 A capital gain is defined as the tax paid when one sells an asset.

the tax rate one pays when one moves into a higher tax bracket.

an unanticipated increase in income.

the positive difference between the sale price and the purchase price of an asset.

52 Corporate profits are

taxed twiceonce by the corporate tax system, and again by personal tax system when they are paid to stockholders as dividends.

taxed only when a stockholder sells his or her shares of stock.

taxed at too low a rate.

taxed three timesonce by the corporate tax system, again by the personal tax system, and again as capital gains.

53 Social Security taxes are regressive because

they apply only to rich people.

they are not applied to income beyond a certain amount.

they are applied to welfare recipients.

they are applied to retired people only.

54 The largest share of federal government tax receipts is derived from

excise taxes.

individual income taxes.

corporate income taxes.

social insurance contributions.

55 Local government expenditures depend on which taxes?

Social Security taxes

Local property, sales, and excise taxes

Capital gains taxes

Revenues from licenses and permits

56 When the purchase price of an asset is less than its sale price, then there is a

budget deficit.

corporate income tax.

capital gain.

capital loss.

57 The earnings that a corporation saves for investment in other productive activities are

transfers in kind. c

apital gains.

tax incidence.

retained earnings.

58 Tax incidence refers to

determining who sends the taxes into the government.

the distribution of tax burdens among groups, or who really pays a tax.

the tendency of some people to avoid paying taxes at all.

determining the marginal tax rate applied to any increase in income.

59 Social Security taxes are paid by

neither employers nor employees

both employers and employees.

employers only.

employees only.

1 a. Construct a numerical example to show that the exclusion of municipal bond interest from income taxation is equivalent to a government subsidy of state and local capital spending.

b. Explain why it costs the government (taxpayers) more to subsidize this activity through the exclusion of municipal bond interest than it would be to simply give the subsidy directly.

2a. Explain what economists mean when they classify taxes as being progressive, proportional or regressive.

b. How would you classify a tax in which every person paid $1000?

c. How would you classify a tax in which the first $50,000 of income was tax exempt and then anything above $50,000 was taxed at a rate of 20%?

d. How would you classify a tax in which every person paid 8% of their income? Explain

3. A nation has a tax rate of 20% on the first $20,000 of taxable income, 30% on the next $30,000, 40% on the next $20,000 and then 50% on all taxable income above $70,000.

a. Find the ATR of someone with a taxable income of $100,000.

b. How much is a tax credit of $1000 worth to someone with a taxable income of $40,000?

c. How much is a tax credit of $1000 worth to someone with a taxable income of $60,000?

d. How much would a $1000 deduction be worth to someone with a taxable income of $40,000?

e. How much would a $1000 deduction be worth to someone with a taxable income of $60,000?

4. Assume you believe that income is a good proxy for ability to pay. What decisions what you have to make in order to make this operational?

5.Explain the connection between

a. tax burdens and elasticities

b. excess burden and elasticity

c. from the point of view of efficiency, is it better to tax items with a small or a large elasticity? Why?

6. The federal per unit excise tax on gasoline is increased and an industry analyst predicts that the increase will be entirely passed on to consumers. Show two cases in which the analyst would be correct. How likely is it that either of these two cases would occur in practice?