Intro to Taxation

  • Upload
    steve

  • View
    215

  • Download
    0

Embed Size (px)

Citation preview

  • 7/25/2019 Intro to Taxation

    1/52

    Econ S-1814

    Danny Shoag

    Lecture 9: Introduction to Taxation

  • 7/25/2019 Intro to Taxation

    2/52

    Outline

    Warning!! Boring but important!

    ! Demand & Supply Curves:! Aggregation

    ! Consumer + Producer Surplus

    ! Elasticity

    ! Taxes! Deadweight loss

    ! Incidence

    More interestingExamples

  • 7/25/2019 Intro to Taxation

    3/52

    Taxation

    (drawing heavily from Chetty lectures)

    ! Who pays a tax? Who gets a subsidy?! Tobacco tax, EITC, food stamps, etc

    ! Key Idea: Statutory Incidence !Economic Incidence

  • 7/25/2019 Intro to Taxation

    4/52

    Reminder about Demand Curves

    0

    50

    100

    150

    200

    250

    0 10 20 30 40 50 60

    Price

    Quantity

    Demand Curve

    Price Number of people willing to

    pay that price

    !" #"

    $! ##

    $" #!

    #! $"

    #" !"%" %""

  • 7/25/2019 Intro to Taxation

    5/52

    Demand Curves

    0

    50

    100

    150

    200

    250

    0 10 20 30 40 50 60

    Price

    Quantity

    Demand Curve

  • 7/25/2019 Intro to Taxation

    6/52

    Calculating Consumer Surplus

    Price People Reason Formula Surplus

    !" #"

    #" '()'*( +,**,-. /) '01 2!"

    3-*1 405( /) '01 26" #"782!"926":

    2$""

    $! ##

    # ;)

  • 7/25/2019 Intro to Taxation

    7/52

    Graphing Consumer Surplus

  • 7/25/2019 Intro to Taxation

    8/52

    Price Elasticity

    ! What does it mean?

  • 7/25/2019 Intro to Taxation

    9/52

    Price Elasticity

    ! What does it mean?

  • 7/25/2019 Intro to Taxation

    10/52

    Price Elasticity

    ! What does it mean?

    ! A percent in demand/supply for a one percent change in price

    ! Unit free!

  • 7/25/2019 Intro to Taxation

    11/52

    Elasticity

    ! That formula can be rewritten:

    ! The numerator is the slope of the demand/supply curve with

    respect to price

  • 7/25/2019 Intro to Taxation

    12/52

    Calculating a Demand Elasticity

    0

    50

    100

    150

    200

    250

    0 10 20 30 40 50 60

    Price

    Quantity

    Demand Curve

    Price QuantityDemanded

    PercentChange in

    Price

    PercentChange in Q

    !" #"

    $! ##

    $" #!

    #! $"

    #" !"

    %" %""

  • 7/25/2019 Intro to Taxation

    13/52

    Calculating a Demand Elasticity

    0

    50

    100

    150

    200

    250

    0 10 20 30 40 50 60

    Price

    Quantity

    Demand Curve

    Price QuantityDemanded

    PercentChange in

    Price *

    PercentChange in Q

    !" #"

    $! ## 9%"> %">

    $" #! 9%#> %#>

    #! $" 9$=> $=>

    #" !" 9#!> #!>

    %" %"" 9%""> %"">

  • 7/25/2019 Intro to Taxation

    14/52

    Calculating a Demand Elasticity

    ! The elasticity here is -1. When the price goes down by 1% , the

    quantity demanded goes up by 1%.

    ! Here the elasticity is constant (doesnt depend on where you are onthe curve). That doesnt have to be true!!

    Price QuantityDemanded

    PercentChange in

    Price *

    PercentChange in Q

    50 20

    45 22 -10% 10%

    40 25 -12% 12%

    25 40 -46% 46%

    20 50 -25% 25%

    10 100 -100% 100%

  • 7/25/2019 Intro to Taxation

    15/52

    Supply

    0

    10

    20

    30

    40

    5060

    70

    80

    90

    0 10 20 30 40 50 60

    Price

    Quantity

    Supply Curve

    Price Quantity

    Supplied

    !" ?"

    $" =$

    6" $?

    %" %=

  • 7/25/2019 Intro to Taxation

    16/52

    Supply

    0

    50

    100

    150

    200

    250

    0 10 20 30 40 50 60

    Price

    Quantity

    Demand & Supply Curves

  • 7/25/2019 Intro to Taxation

    17/52

    Equilibrium

    0

    50

    100

    150

    200

    250

    0 10 20 30 40 50 60

    Price

    Quantity

    Equilibrium

  • 7/25/2019 Intro to Taxation

    18/52

    Producer Surplus

  • 7/25/2019 Intro to Taxation

    19/52

    Total Surplus

  • 7/25/2019 Intro to Taxation

    20/52

    What does a tax do?

    ! Excise tax per unit. Ad valorem fraction of the price.

  • 7/25/2019 Intro to Taxation

    21/52

    What does a tax do?

  • 7/25/2019 Intro to Taxation

    22/52

    What does a tax do?

  • 7/25/2019 Intro to Taxation

    23/52

    What does a tax do?

  • 7/25/2019 Intro to Taxation

    24/52

    Levied on the demand side

  • 7/25/2019 Intro to Taxation

    25/52

    Levied on the demand side

    $7.5

  • 7/25/2019 Intro to Taxation

    26/52

    Levying on the demand side

  • 7/25/2019 Intro to Taxation

    27/52

    Why is this true?

    ! Post tax equilibrium with supplier taxes is given by

    !We can take the total differential:

    ! This is the change in the price actually paid by consumers

  • 7/25/2019 Intro to Taxation

    28/52

    Why is this true?

    ! Post tax equilibrium with supplier taxes is given by

    !We can take the total differential:

    ! This is the change in the price actually paid by consumers

    Multiplyall terms

    By P/Q

  • 7/25/2019 Intro to Taxation

    29/52

    Why is this true?

    ! Post tax equilibrium with supplier taxes is given by

    !We can take the total differential:

    ! How do we know its positive?

  • 7/25/2019 Intro to Taxation

    30/52

    Why is this true?

    ! Post tax equilibrium with supplier taxes is given by

    !We can take the total differential:

    ! This is the change in the price actually paid by consumers

  • 7/25/2019 Intro to Taxation

    31/52

    Why is this true?

    ! Suppose we now put the tax on the consumer side

    ! Price paid by consumers is p+ t!

  • 7/25/2019 Intro to Taxation

    32/52

    Why is this true?

    ! Suppose we now put the tax on the consumer side

    ! Price paid by consumers is p+ t!

    Multiply

    all terms

    By P/Q

    again

  • 7/25/2019 Intro to Taxation

    33/52

    Why is this true?

    ! Suppose we now put the tax on the consumer side

    ! Price paid by consumers is p+ t!

    This is

    equal to 1I justreplaced it

  • 7/25/2019 Intro to Taxation

    34/52

    Why is this true?

    ! Suppose we now put the tax on the consumer side

    ! Price paid by consumers is p+ t!

    Same as

    before!

  • 7/25/2019 Intro to Taxation

    35/52

    Perfectly Inelastic

  • 7/25/2019 Intro to Taxation

    36/52

    Perfectly Elastic

  • 7/25/2019 Intro to Taxation

    37/52

    Deadweight Loss

    ! DWL = !"Q "t

  • 7/25/2019 Intro to Taxation

    38/52

    Deadweight Loss

    ! DWL = !"Q "t

  • 7/25/2019 Intro to Taxation

    39/52

    Deadweight Loss

    ! DWL = !"Q "t

  • 7/25/2019 Intro to Taxation

    40/52

    Deadweight Loss

    ! DWL = !"Q "t

  • 7/25/2019 Intro to Taxation

    41/52

    Deadweight Loss

    ! DWL = !"Q "t

  • 7/25/2019 Intro to Taxation

    42/52

    Deadweight Loss

    ! DWL = !"Q "tDeadweight Loss

    * Grows with the square of the

    tax rate

    *Increases with the elasticities

    * Increases with the budget share

  • 7/25/2019 Intro to Taxation

    43/52

  • 7/25/2019 Intro to Taxation

    44/52

    Examples finally!

    ! State tobacco taxes whats your prior?

  • 7/25/2019 Intro to Taxation

    45/52

    Examples finally!!

    Evans, Ringel, & Stech: pass-through estimates ~100%! Demand elasticity is about -.42

    ! What does that imply about supply-elasticity?

    ! What does this tell us about the market?! Who bears pays the tax?

    ! Interesting fewer cig purchasessame cotinine in lungs

    --Elasticity!

  • 7/25/2019 Intro to Taxation

    46/52

    Hastings & Washington

    ! NV gave food stamps at the first of the month

    ! Grocery expenditure for benefit households is 20-30%

    higher in the first week

    ! Stores in poor neighborhoods raise prices 3% that week

    ! What does this tell us about that market?

  • 7/25/2019 Intro to Taxation

    47/52

    Hastings & Washington

    ! Who benefits from this policy?

  • 7/25/2019 Intro to Taxation

    48/52

    Other Examples

    ! EITC and low-wages workers (Rothstein) ! Employers can lower wages and people will still work

    ! Finds EITC workers gain $.70 per $1, employers gain $.70,

    ineligible low-skilled workers loss $.4

    ! Medicare part D (Friedman)

    ! Capitalization in to asset prices

    ! Drug companies captured about 1/3 of the surplus

  • 7/25/2019 Intro to Taxation

    49/52

    Last Example (Linden & Rockoff)

  • 7/25/2019 Intro to Taxation

    50/52

    Linden & Rockoff

    ! Housing Prices fall 4% -- huge implied cost!

  • 7/25/2019 Intro to Taxation

    51/52

    Thought Experiment

    ! Suppose your state wanted to enhance maternity benefits.What will determine who benefits?

  • 7/25/2019 Intro to Taxation

    52/52

    Think about for next time

    ! How do these forces differ at local and national levels?

    ! Local market power vs. national market power

    ! Ability for workers and capital to move

    ! Salience and evasion opportunities