Oct 17, 2011
Economics – Textbook Notes
Everything you earn and almost everything you buy is taxed.
Tax incidence is the division of the burden of a tax between buyers and sellers.
The price paid by buyers might rise by the full amount of the tax, then the burden
of the tax falls entirely on buyers – the buyers pay the tax
The price paid by buyers might rise by a lesser amount than the tax, then the
burden of the tax falls partly on buyers and partly on sellers
The price paid by buyers might not change at all, then the burden of the tax falls
entirely on sellers
Tax on Sellers
A tax on sellers is like an increase in cot, so it decreases supply. To determine the
position of the new supply curve, we add the tax to the minimum price that sellers are
willing to accept for each quantity sold.
Tax on Buyers
A tax on buyers lower the amount there are willing to pay sellers, so it decreases demand
and shirts the demand curve leftwards. To determine the position of this new demand
curve, we subtract the tax from the maximum price that buyers are willing to pay for each
Equivalence of Tax on Buyers and Sellers
Can we Share the Burden Equally?
o The tax had the same effect regardless of whether it is imposed on sellers
or buyers, So imposing half the tax on one and half on the other is like an
o When a transaction is taxed, there are two prices: the price paid by the
buyer, which includes tax; and the price received by sellers, which
excludes the tax.
Buyers respond to the price that includes the tax
Sellers respond to the price that excludes the tax
The Employment Insurance Tax
o The Employment Insurance Tax is an example of a tax that the federal
government imposes on both buyers of labour (employers) and sellers of
o The division of the burden of a tax between buyers and sellers depends on
the elasticity of demand and supply
Tax Incidence and Elasticity of Demand
The division of the tax between buyers and sellers depends in part on the elasticity of