Class#39 12/5/11

Rizzo started class by putting up a few things on the board. One was a graph of the bubble gum market and how it is affected by taxes.  Before the tax on bubble gum, the equilibrium proce was $3 at which 3 million packs of gum were sold. After the $1 tax, buyers had to pay $3.75 for gum and Sellers only gained $2.75 from it. The quantity demanded at this new price was 2.75 million packs of gum. From this, $2.75 million dollars of tax revenue was produced.

	Buyers	Sellers
Initial P	$3.00	$3.00
Final P	$3.75	$3.75	+$1= $2.75
Tax Paid	------	$1.00
Economic Burden	75 cents	25 cents

Rizzo told us that TAXES ARE ONLY A TRANSFER OF MONEY, NOT A COST

When we make things illegal, we change the incentives of people who supply it. Becomes more inelastic. The cost of production increases more rapidly with more produced. The buyers curve is inelastic.

3 results come from this

1.     Higher price causing more people to end up in the selling market

2.     More violence

3.     Increase in the strength of the drug sold. Ex. Hard liquor over beer during prohibition

When it becomes illegal, we have to enforce the law. Two costs come from this. 1. Is raising taxes (act of enforcing is costly) More money spent for prisons, courts, ect. It is also an opportunity cost to cops. They could use their time to do more productive things, (build bridges ect)

The US imprisons more people per capita than any other country. This won’t change because it will cause a huge job loss. 35 billion a year is spent to directly enforce drug prohibition. 350,000 people are currently behind bars. 1.2 million possession rests occur every year. 

Because things are illegal, the costs of producing it go down. There is no OSHA, or taxes that have to be paid by the producers. These costs exceed production costs. This shifts the supply curve out. The price of obtaining drugs has fallen from this.

More violent crimes and homicides occur from drugs being illegal. In California they have the 3 strike rule. This causes more violence because the marginal cost of having a bad 3^rd crime has dropped.  It doesn’t matter what the third crime is so once you commit the third crime, you can do another one because either way your going to jail for 15-20 years.

Global warming is no longer an issue. We repeal prohibition when the economy sucks. Liquor taxation prior to 1913 was 1/3 of taxation revenue. Prohibition was ended to raise revenues during WW2.

In the graph of the bubble gum market, the excise tax is a legal liability of tax on the seller. The seller needs to write the check to the government.

Taxes on suppliers affect the supply curve.  Supplier is willing to sell gum for $4. Shifts up by the amount of tax. A new equilibrium is made.

This tax prevented a lot of other transactions from occurring. The tax is greater than the value of the transaction that occurs so less transactions occur. The world would have been richer without the tax.

Taxes prevent socially beneficial transactions from occurring. A DEAD WEIGHT LOSS is a transaction that would have happened had there not been a tax.  30% value of things lost from taxes. The government has 4 trillion in tax revenues. 1.2 trillion of transactions don’t occur because of poor taxations. As the economy grows, this number gets bigger.

It costs resources to collect and monitor taxes. Cost of IRS is $11 billion every year. 4 cents of tax collected to pay the IRS. Employ as much as Ford motor vehicles but produce nothing of value. Won’t change because of built in beurocracy.

When tax fraud happens, we spend resources to fraud the IRS. Tax rates go up for people who don’t fraud the government.