Rizzo put up the same graph as last class regarding the bubble gum market. The only difference is that this time, the buyer is taxed the dollar rather than the seller. When you work it out, you see that it makes no difference in the burden that occurs for each party.
Buyers | Sellers | |
Initial P | $3.00 | #3.00 |
Final P | $2.75 | $2.75 |
Tax Paid | $1.00 | -------- |
Burden (real cost) | $0.75 | $0.25 |
Of the $1.00 tax imposed, the buyer is affected by 75 cents and the seller is affected by 25 cents.
Before the tax, the equilibrium price was $3.00. After the tax, the new equilibrium price is $2.75
New Qt= 2.75 million. Before the tax it was 3 million. The new Pb= $3.75 before the tax it was $3.00. The new Ps= $2.75. Before the tax it was $3.00
An excise tax puts the legal liability on the seller meaning that the firm has the legal liability to write the check.
The equilibrium will change from this. Also the tax generated raises $2.75 million in revenue instead of $3 million from a reduction of quantity bought. Taxes are distortionary. They prevent better transactions from happening.
Over $1 trillion is destroyed a year from these effects. If 100,000 people worked in renewable energy instead of the IRS which produces nothing of value, it would be more beneficial for our economy.
Problem with the 51 page tax report that Rizzo got is that a ton of time is spent doing taxes. Rizzo spent 15 hours last year doing them. $400 billion a year is lost in the US by people’s efforts to get their taxes ready. This is an opportunity cost.
General Electric made $3 billion in taxes last year instead of losing money in paying taxes. They had a 57,000 page tax return. Taxes can produce large social value. They can be very good. Many times we do dumb things with tax revenues. We spend more than we tax, so we have to tax more. Sales tax is pair for by the company in advance so that the buyer doesn’t have to pay them for every product that they buy. In the above example, If the buyer is taxed a dollar. They get $2 of value from the gum instead of $3. The reason why the price drops to $2.75 if the buyer is taxed is that there is less demand for the pack of gum. Regardless of who sends the check, the burdens will be the same for both parties. Economic incidence of a tax is the same as the legal incidence of a tax. Buyers pay more of the tax than the servers.
Payroll taxes will hit us hard. We say firms and workers split tax. This is very burdensome. Both now have to send checks.
The labor demand elasticity is very high. The opposite is true as well. It has an elasticity factor of 3. For every 1% that firms are charged more. They change their labor workers by 3%.
Rizzo pays $37,800 in taxes a year. This is equivalent to $19.00 an hour to the government. What determines who pays is the relative elasticity of supply and demand. (shape of supply and demand curve). When we tax something, we get less. When buyers are incentivised to change and sellers are sensitive, buyers are hit harder by the tax.
The things that we should tax are things that are inelastic. Ex. Food, property, death, head tax, addictive goods.
SUBSIDIES
An increase in the supply and demand curve does not only benefit 1 side. The government gave a 53 cent subsidy per gallon to the refiner for ethanol usage. Subsidy for producer, this doesn’t allow foreign companies to come in and trade. The supply curve shifts out. Instead of $3.00 a gallon, gas stations will charge $2.90 but they will receive a total of $3.43 per gallon since the government will give them 53 cents per gallon. The supplier gets 80% of the benefit (43/53=80%) the buyer will get 20% of the benefit (10/53=20%ish). Subsidies relate to the supply and demand elasticity rather than subsidies. Both the buyers and sellers are better off from it.
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