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Economics (14)
01:220:102 (14)
Chapter 7

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Department
Economics
Course
01:220:102
Professor
Thomas Prusa
Semester
Fall

Description
Chapter 7- Taxes 7-1  Excise tax- tax on sales of a good or service o Drives a wedge between the price paid by consumers and that received by producers, leading to a fall in the quantity transacted o Creates inefficiency by distorting incentives and creating missed opportunities  Incidence of a tax is a measure of who really pays it o Doesn’t depend on who the tax is officially levied on o Depends on the price elasticities of demand and of supply  The higher the price elasticity of supply and lower the price elasticity of demand  heavier the burden of an excise tax on consumers  The lower the price elasticity of supply and higher the price elasticity of demand  heavier the burden of an excise tax on producers 7-2  Tax rate- amount of tax people are required to pay per unit of whatever is being taxed  Tax revenue- tax rate times the number of units of the good or service transacted o Government tax revenue collected is less than the loss in total surplus because the tax creates inefficiency by discouraging some mutually beneficial transactions  Deadweight loss from the tax- difference between the tax revenue from an excise tax and the reduction in total surplus  Administrative costs of a tax- resources used by government to collect the tax, and by taxpayers to pay it, over and above the amount of the tax, as well as to evade it  The larger the number of transactions prevented by a tax  larger the deadweight loss o Taxes on goods with a greater price elasticity of supply or demand, or both, generate higher deadweight losses o No deadweight loss when the number of transactions is unchanged by the tax 7-3  Government tax policy aims for tax efficiency; also tries to achieve tax fairness, or tax equity  Benefits principle of tax fairnes
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