# Intro to Taxation

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Econ S-1814

Danny Shoag

Lecture 9: Introduction to Taxation

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Outline

Warning!! Boring but important!

! Demand & Supply Curves:! Aggregation

! Consumer + Producer Surplus

! Elasticity

! Incidence

More interestingExamples

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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

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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

!" #"

\$! ##

\$" #!

#! \$"

#" !"%" %""

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Demand Curves

0

50

100

150

200

250

0 10 20 30 40 50 60

Price

Quantity

Demand Curve

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Calculating Consumer Surplus

Price People Reason Formula Surplus

!" #"

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

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

2\$""

\$! ##

# ;)

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Graphing Consumer Surplus

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Price Elasticity

! What does it mean?

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Price Elasticity

! What does it mean?

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Price Elasticity

! What does it mean?

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

! Unit free!

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Elasticity

! That formula can be rewritten:

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

respect to price

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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

!" #"

\$! ##

\$" #!

#! \$"

#" !"

%" %""

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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%""> %"">

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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%

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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" \$?

%" %=

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Supply

0

50

100

150

200

250

0 10 20 30 40 50 60

Price

Quantity

Demand & Supply Curves

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Equilibrium

0

50

100

150

200

250

0 10 20 30 40 50 60

Price

Quantity

Equilibrium

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Producer Surplus

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Total Surplus

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What does a tax do?

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

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What does a tax do?

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What does a tax do?

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What does a tax do?

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Levied on the demand side

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Levied on the demand side

\$7.5

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Levying on the demand side

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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

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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

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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?

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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

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Why is this true?

! Suppose we now put the tax on the consumer side

! Price paid by consumers is p+ t!

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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

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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

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Why is this true?

! Suppose we now put the tax on the consumer side

! Price paid by consumers is p+ t!

Same as

before!

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Perfectly Inelastic

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Perfectly Elastic

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! DWL = !"Q "t

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! DWL = !"Q "t

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! DWL = !"Q "t

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! DWL = !"Q "t

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! DWL = !"Q "t

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! DWL = !"Q "tDeadweight Loss

* Grows with the square of the

tax rate

*Increases with the elasticities

* Increases with the budget share

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Examples finally!

! State tobacco taxes whats your prior?

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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!

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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?

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Hastings & Washington

! Who benefits from this policy?

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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

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Last Example (Linden & Rockoff)

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Linden & Rockoff

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

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Thought Experiment

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

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