Lecture 12: Tax Incidence

Admin RFHPG Tax Types 3 Rules Extensions GE Tax

November 17, 2015 Admin RFHPG Tax Types 3 Rules Extensions GE Tax Overview

Course Administration

Ripped From Headlines

Public Goods

Types of Taxation

Three Rules of Tax Incidence

Tax Incidence Extensions

General Equilibrium Tax Incidence Admin RFHPG Tax Types 3 Rules Extensions GE Tax Course Administration

1. Problem Set 11 posted, Problem Set 9 answers posted 2. Last year’s final posted 3. Elasticity note • Due final class • Post memo by 8 pm tonight to get included in my group-making • Will post groups and suggested timeline under Handouts -¿ Elasticity memo by 5 pm Wed.: return comments by 8 pm 11/22 • Feel free to modify terms with your group as you see fit Admin RFHPG Tax Types 3 Rules Extensions GE Tax Ripped from the Headlines

Next Week

Afternoon Finder Presenter Carly Evans Michael Downey

Evening Finder Presenter Jenny Lewis Alysse Henkel Konark Sikka Tosin Ajayi Admin RFHPG Tax Types 3 Rules Extensions GE Tax Public Goods Recap

• Podcasts • Lighthouses and autopsies • Asteroids, or destruction thereof • Public goods not necessarily publicly provided goods! • Questions? Admin RFHPG Tax Types 3 Rules Extensions GE Tax Many Types of Taxation

• Payroll tax • Income tax • Corporate tax • Wealth taxes • Property tax • Estate tax • Consumption tax • Sales tax • Excise tax – sales tax applied only to certain goods • Value added tax Admin RFHPG Tax Types 3 Rules Extensions GE Tax Type of Taxation Shifted Dramatically in US Admin RFHPG Tax Types 3 Rules Extensions GE Tax Taxation Type Varies Substantially by Country Admin RFHPG Tax Types 3 Rules Extensions GE Tax Key Tax Deﬁnitions

• Tax base: that on which the tax is levied • Base for property tax is value of properties • Base for sales tax is value of sales • Tax rate: rate at which base is taxed • DC’s General tangible property and selected services tax rate is 5.75% • DC’s parking tax rate is 18% • Horizontal equity • Tax equivalent goods equally • Don’t tax hot dogs and fail to tax sausages • Hard to deﬁne in practice

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax Fairness

• Vertical equity • People with more money should may “more taxes” (total, or higher rate?) than people with less money Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax Fairness

• Vertical equity • People with more money should may “more taxes” (total, or higher rate?) than people with less money • Horizontal equity • Tax equivalent goods equally • Don’t tax hot dogs and fail to tax sausages • Hard to deﬁne in practice Study the three rules of tax incidence 1. Statutory burden of tax 6= economic incidence of tax 2. Side of the market on which tax is imposed is irrelevant to distribution of tax burdens 3. Parties with inelastic supply or demand bear taxes

Admin RFHPG Tax Types 3 Rules Extensions GE Tax You Levy a Tax – Who Pays?

The US income tax has shifted from a reliance on corporate taxes to income tax. Does this mean workers are paying more? “Who pays?” = tax incidence Admin RFHPG Tax Types 3 Rules Extensions GE Tax You Levy a Tax – Who Pays?

The US income tax has shifted from a reliance on corporate taxes to income tax. Does this mean workers are paying more? “Who pays?” = tax incidence Study the three rules of tax incidence 1. Statutory burden of tax 6= economic incidence of tax 2. Side of the market on which tax is imposed is irrelevant to distribution of tax burdens 3. Parties with inelastic supply or demand bear taxes U.S. excise tax examples • federal tax on bows, archery equipment and and arrow shafts • gasoline • wine, varying by type, highest on “naturally sparkling”

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Types of Taxation

• specific excise tax: per unit tax • ad valorem tax: tax that is a fixed percentage of the sale price We will present everything with a specific excise tax. Results are equally applicable to an ad valorem tax. Admin RFHPG Tax Types 3 Rules Extensions GE Tax Types of Taxation

U.S. excise tax examples • federal tax on bows, archery equipment and and arrow shafts • gasoline • wine, varying by type, highest on “naturally sparkling” Admin RFHPG Tax Types 3 Rules Extensions GE Tax Key Phrases

Incidence ≡ who pays the tax, or who “bears the burden” of the tax. • Statutory incidence determined by who pays the tax to the government • Economic incidence determined by whose economic resources change due to the tax Admin RFHPG Tax Types 3 Rules Extensions GE Tax 1. Statutory Incidence 6= Economic Incidence What Happens When you Levy a Tax on the Producer?

price per gallon of gas S

Q quantity of gas in o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax 1. Statutory Incidence 6= Economic Incidence What Are the New Equilibrium Price and Quantity?

S’ price per gallon of gas S tax

Q quantity of gas in o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax 1. Statutory Incidence 6= Economic Incidence How Much Extra is the Consumer Paying?

S’ price per gallon of gas S tax

Q Q quantity of gas in n o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax 1. Statutory Incidence 6= Economic Incidence How Much Extra is the Producer Paying?

S’ price per gallon of gas S tax

P consumer’s n burden Po

Q Q quantity of gas in n o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax 1. Statutory Incidence 6= Economic Incidence Producer and Consumer Share the Burden of the Tax

S’ price per gallon of gas S tax

P consumer’s n burden Po producer’s burden

Q Q quantity of gas in n o billions of gallons • producer tax burden • = (pre-tax price - post-tax price) + per-unit tax payment by producer • = per-unit tax payment by producer - beneﬁt/loss in price change to producer • = (Po − Pn)+ per-unit tax payments by producers • = tax − (Pn − Po ) = tax + (Po − Pn)

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Deﬁning Tax Burdens, Tax on Producer

• consumer tax burden • = (post-tax price - pre-tax price) + per-unit tax payment by consumer • = beneﬁt/loss in price change to consumer + per-unit tax payment by consumer • = (Pn − Po )+ per-unit tax payments by consumers • = Pn − Po • producer tax burden • = (pre-tax price - post-tax price) + per-unit tax payment by producer • = per-unit tax payment by producer - beneﬁt/loss in price change to producer • = (Po − Pn)+ per-unit tax payments by producers • = tax − (Pn − Po ) = tax + (Po − Pn) • Pt = PS + 2 → PS = Pt − 2

• Market supply is still QS = 2PS + 2 • We’d like to know market supply as a function of the taxed price

• QS = 2Ps + 2 • QS = 2(Pt − 2) + 2 • QS = 2Pt − 4 + 2 = 2Pt − 2 • If you prefer, you can think of the intercept of the supply curve shifting up by 2

• so express PS in terms of QS • plug into Pt = PS + 2

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Finding New Supply

• Suppose that the supply curve before the tax is QS = 2PS + 2. • How does the supplier perceive a tax of $2/unit? → PS = Pt − 2

• Market supply is still QS = 2PS + 2 • We’d like to know market supply as a function of the taxed price

• QS = 2Ps + 2 • QS = 2(Pt − 2) + 2 • QS = 2Pt − 4 + 2 = 2Pt − 2 • If you prefer, you can think of the intercept of the supply curve shifting up by 2

• so express PS in terms of QS • plug into Pt = PS + 2

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Finding New Supply

• Suppose that the supply curve before the tax is QS = 2PS + 2. • How does the supplier perceive a tax of $2/unit?

• Pt = PS + 2 • Market supply is still QS = 2PS + 2 • We’d like to know market supply as a function of the taxed price

• QS = 2Ps + 2 • QS = 2(Pt − 2) + 2 • QS = 2Pt − 4 + 2 = 2Pt − 2 • If you prefer, you can think of the intercept of the supply curve shifting up by 2

• so express PS in terms of QS • plug into Pt = PS + 2

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Finding New Supply

• Suppose that the supply curve before the tax is QS = 2PS + 2. • How does the supplier perceive a tax of $2/unit?

• Pt = PS + 2 → PS = Pt − 2 • We’d like to know market supply as a function of the taxed price

• QS = 2Ps + 2 • QS = 2(Pt − 2) + 2 • QS = 2Pt − 4 + 2 = 2Pt − 2 • If you prefer, you can think of the intercept of the supply curve shifting up by 2

• so express PS in terms of QS • plug into Pt = PS + 2

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Finding New Supply

• Suppose that the supply curve before the tax is QS = 2PS + 2. • How does the supplier perceive a tax of $2/unit?

• Pt = PS + 2 → PS = Pt − 2

• Market supply is still QS = 2PS + 2 • If you prefer, you can think of the intercept of the supply curve shifting up by 2

• so express PS in terms of QS • plug into Pt = PS + 2

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Finding New Supply

• Suppose that the supply curve before the tax is QS = 2PS + 2. • How does the supplier perceive a tax of $2/unit?

• Pt = PS + 2 → PS = Pt − 2

• Market supply is still QS = 2PS + 2 • We’d like to know market supply as a function of the taxed price

• QS = 2Ps + 2 • QS = 2(Pt − 2) + 2 • QS = 2Pt − 4 + 2 = 2Pt − 2 Admin RFHPG Tax Types 3 Rules Extensions GE Tax Finding New Supply

• Suppose that the supply curve before the tax is QS = 2PS + 2. • How does the supplier perceive a tax of $2/unit?

• Pt = PS + 2 → PS = Pt − 2

• Market supply is still QS = 2PS + 2 • We’d like to know market supply as a function of the taxed price

• QS = 2Ps + 2 • QS = 2(Pt − 2) + 2 • QS = 2Pt − 4 + 2 = 2Pt − 2 • If you prefer, you can think of the intercept of the supply curve shifting up by 2

• so express PS in terms of QS • plug into Pt = PS + 2 Admin RFHPG Tax Types 3 Rules Extensions GE Tax 2. Side of the Market on Which Tax is Imposed Irrelevant to Distribution of Tax Burden

• Suppose that the gasoline tax is levied on the consumer, not the producer • This means you buy some gas and send a check to the government Admin RFHPG Tax Types 3 Rules Extensions GE Tax Consumer Pays Tax What Happens When you Levy a Tax on the Consumer?

price per gallon of gas S

Q quantity of gas in o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Consumer Pays Tax What Are the New Equilibrium Price and Quantity?

price per gallon of gas S

t D D’ Q quantity of gas in o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Consumer Pays Tax How Much Lower Price Does the Producer Suﬀer?

price per gallon of gas S

Po Pn

t D D’ Q Q quantity of gas in n o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Consumer Pays Tax How Much Does the Consumer Pay?

price per gallon of gas S

P producer’s o burden Pn

t D D’ Q Q quantity of gas in n o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Consumer Pays Tax Producer and Consumer Share the Burden of the Tax

price per gallon of gas S

consumer’s burden P producer’s o burden Pn

t D D’ Q Q quantity of gas in n o billions of gallons = t − (Pn − Po ) = t + (Po − Pn) • producer burden = Pn − Po + 0 • When tax is levied on producers

• producer burden = t − (Pn − Po ) • consumer burden = Pn − Po • Note that • In both cases, total burden is tax • The total price change faced by producers and consumers is equal regardless of the side of the market with the tax (more clear in factor market analysis)

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Consider Burdens

• When tax is levied on consumers • consumer burden = Pn − Po + 0 • When tax is levied on producers

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Consider Burdens

• When tax is levied on consumers

• consumer burden = t − (Pn − Po ) = t + (Po − Pn) • producer burden • When tax is levied on producers

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Consider Burdens

• When tax is levied on consumers

• consumer burden = t − (Pn − Po ) = t + (Po − Pn) • producer burden = Pn − Po + 0 • Note that • In both cases, total burden is tax • The total price change faced by producers and consumers is equal regardless of the side of the market with the tax (more clear in factor market analysis)

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Consider Burdens

• When tax is levied on consumers

• consumer burden = t − (Pn − Po ) = t + (Po − Pn) • producer burden = Pn − Po + 0 • When tax is levied on producers

• producer burden = t − (Pn − Po ) • consumer burden = Pn − Po Admin RFHPG Tax Types 3 Rules Extensions GE Tax Consider Burdens

• When tax is levied on consumers

• consumer burden = t − (Pn − Po ) = t + (Po − Pn) • producer burden = Pn − Po + 0 • When tax is levied on producers

• Tax wedge is sum of consumer and producer burdens • Does the wedge change if the tax is levied on consumers? Admin RFHPG Tax Types 3 Rules Extensions GE Tax In-Class Problem

The demand for rutabagas is Q = 2, 000 − 100P, and the supply of rutabagas is Q = 200P − 100. 1. Who is likely to bear the statutory incidence of a $2/unit tax on the sale of rutabagas? Re-write one of the curves appropriately. 2. Who bears the economic incidence of this tax? Admin RFHPG Tax Types 3 Rules Extensions GE Tax 3. Inelastic Party Bears Tax Burden

• Return to statutory tax burden levied on producers • Consider inelastic demand • Consider elastic demand Admin RFHPG Tax Types 3 Rules Extensions GE Tax Inelastic Demand What Does Inelastic Demand Look Like?

price per gallon of gas S

quantity of gas in billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Inelastic Demand What is the Original Equilibrium P and Q?

price per gallon of gas D S

quantity of gas in billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Inelastic Demand How Does the Tax Shift Production?

price per gallon of gas D S

Q quantity of gas in o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Inelastic Demand What Are the New Equilibrium P and Q?

S’ price per gallon of gas D S tax

Q quantity of gas in o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Inelastic Demand What is the Consumer’s Burden?

S’ price per gallon of gas D S tax

Q =Q quantity of gas in o n billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Inelastic Demand Consumer Cannot Run Away From Tax

S’ price per gallon of gas D S tax

Pn consumer’s burden Po

Q =Q quantity of gas in o n billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Elastic Demand What Does Elastic Demand Look Like?

price per gallon of gas S

quantity of gas in billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Elastic Demand How Does Tax on Producer Shift Supply?

price per gallon of gas S

Po D

Q quantity of gas in o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Elastic Demand What are the New Equilibrium P and Q?

S’ price per gallon of gas S tax

Po D

Q quantity of gas in o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax Elastic Demand Producer Bears Entire Burden

S’ price per gallon of gas S tax

Pn=Po D

Q Q quantity of gas in n o billions of gallons Admin RFHPG Tax Types 3 Rules Extensions GE Tax And the Same is True for Supply Admin RFHPG Tax Types 3 Rules Extensions GE Tax 3 Extensions

1. Tax incidence in factor markets 2. (skip) Tax incidence in perfectly competitive markets 3. (skip) Balanced budget tax incidence • Do wages decrease? Or do product prices increase? • Who bears the burden of the tax?

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax Incidence in Factor Markets

• Suppose a tax is levied on a factor of production • tax on labor • tax on capital, such as land or steel Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax Incidence in Factor Markets

• Suppose a tax is levied on a factor of production • tax on labor • tax on capital, such as land or steel • Do wages decrease? Or do product prices increase? • Who bears the burden of the tax? Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax on Workers

• Suppose the government decides to levy a tax on workers • It can either charge workers via a payroll tax • Or it can charge employers via a payroll tax • Does it matter? Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax on Workers (Producers) vs. Tax on Firms (Consumers) How Does Tax on Workers (=Producers) Shift Supply?

tax on workers tax on firms

S S

Po Po

D D

Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax on Workers (Producers) vs. Tax on Firms (Consumers) What Are the New Equilibrium P and Q?

tax on workers tax on firms S’ S S t

Po Po

D D

Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax on Workers (Producers) vs. Tax on Firms (Consumers) What is the Consumer (Labor Purchaser) Burden?

tax on workers tax on firms S’ S S t

Po Po

D D

Qn Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax on Workers (Producers) vs. Tax on Firms (Consumers) What is the Producer (Worker/Supplier) Burden?

tax on workers tax on firms S’ S S t

Po Po

D D

Qn Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax on Workers (Producers) vs. Tax on Firms (Consumers) What if Firms Pay the Payroll Tax?

tax on workers tax on firms S’ S S t

Po Po

D D

Qn Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax on Workers (Producers) vs. Tax on Firms (Consumers) New Equilibrium P and Q?

tax on workers tax on firms S’ S S t t

Po Po

D D D’

Qn Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax on Workers (Producers) vs. Tax on Firms (Consumers) Producer (Worker) Burden?

tax on workers tax on firms S’ S S t t

Po Po

D D D’

Qn Qo Qn Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax on Workers (Producers) vs. Tax on Firms (Consumers) Consumer (Labor Purchaser) Burden?

tax on workers tax on firms S’ S S t t

Po Po

D D D’

Qn Qo Qn Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax on Workers (Producers) vs. Tax on Firms (Consumers) Doesn’t Matter Who Pays the Tax

tax on workers tax on firms S’ S S t t

Po Po

D D D’

Qn Qo Qn Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax But What If There is an Impediment to Adjustment?

• Suppose that there is a minimum wage • Compare payroll tax levied on workers • To payroll tax levied on employers Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax with a Minimum Wage How Does Tax on Workers=Producers Shift Supply?

tax on workers tax on firms

S S

min wage

Po Po

D D

Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax with a Minimum Wage What Are the New Equilibrium P and Q?

tax on workers tax on firms S’ S S t

min wage

Po Po

D D

Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax with a Minimum Wage What is the Consumer (Labor Purchaser) Burden?

tax on workers tax on firms S’ S S t

min wage Pn Po Po

D D

Qn Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax with a Minimum Wage What is the Producer (Worker Supplier) Burden?

tax on workers tax on firms S’ S S t

min wage Pn Po Po

D D

Qn Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax with a Minimum Wage What if Firms Pay the Payroll Tax?

tax on workers tax on firms S’ S S t

min wage Pn Po Po

D D

Qn Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax with a Minimum Wage New Equilibrium P and Q?

tax on workers tax on firms S’ S S t t

min wage Pn Po Po

D D D’

Qn Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax with a Minimum Wage What Quantity of Workers Can Firms Get?

tax on workers tax on firms S’ S S t t

min wage Pn Po Po

Pdesired

D D D’

Qn Qo Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax with a Minimum Wage Who Bears the Burden?

tax on workers tax on firms S’ S S t t

min wage Pn Po Po

Pdesired

D D D’

Qn Qo Qmw Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Tax with a Minimum Wage Consumers of Labor (Firms) Bear the Burden

tax on workers tax on firms S’ S S t t

min wage Pn Po Po

Pdesired

D D D’

Qn Qo Qmw Qo Admin RFHPG Tax Types 3 Rules Extensions GE Tax Summary of Taxes on Inputs

• Barriers to reaching the competitive market equilibrium can matter for tax incidence • Other barriers include workplace norms, such as norm for not cutting nominal wages • More likely to see these features in input, rather than output markets • Therefore, the party on whom the tax is levied may matter more in input than output markets Admin RFHPG Tax Types 3 Rules Extensions GE Tax General Equilibrium Considerations

1. Illustrative example 2. Issues to consider • time period • scope • spillovers between product markets the restaurants • And what happens to the quantity of restaurant meals consumed? declines

Admin RFHPG Tax Types 3 Rules Extensions GE Tax Taxing Restaurants in Lexington, MA

• Suppose that the city of Lexington, MA passes a restaurant tax • Suppose that demand is perfectly elastic – you can go to the next town to eat dinner • Who bears the tax: restaurants or diners? the restaurants • And what happens to the quantity of restaurant meals consumed? declines • Perhaps in the short run, labor is more elastic than capital, so capital bears the burden =⇒ restaurant owner makes less money • In the long run? restaurants leave, and landowners make less money • In economics, land is the one absolutely ﬁxed thing

Admin RFHPG Tax Types 3 Rules Extensions GE Tax But That’s Not the End

• A restaurant doesn’t pay taxes. In the end, people pay taxes. • Restaurants use capital and labor – who bears the burden? restaurants leave, and landowners make less money • In economics, land is the one absolutely ﬁxed thing

Admin RFHPG Tax Types 3 Rules Extensions GE Tax But That’s Not the End

• A restaurant doesn’t pay taxes. In the end, people pay taxes. • Restaurants use capital and labor – who bears the burden? • Perhaps in the short run, labor is more elastic than capital, so capital bears the burden =⇒ restaurant owner makes less money • In the long run? restaurants leave, and landowners make less money • In economics, land is the one absolutely ﬁxed thing • Long and short-run elasticities should diﬀer – examples? • In general, the longer the period, the more elastic all factors are • Except for land!

Admin RFHPG Tax Types 3 Rules Extensions GE Tax General Equilibrium Issues: Time Period

Overarching rule for general equilibrium tax incidence is to follow the incidence until you get to a person. • In general, the longer the period, the more elastic all factors are • Except for land!

Admin RFHPG Tax Types 3 Rules Extensions GE Tax General Equilibrium Issues: Time Period

Overarching rule for general equilibrium tax incidence is to follow the incidence until you get to a person. • Long and short-run elasticities should diﬀer – examples? Admin RFHPG Tax Types 3 Rules Extensions GE Tax General Equilibrium Issues: Time Period

Overarching rule for general equilibrium tax incidence is to follow the incidence until you get to a person. • Long and short-run elasticities should diﬀer – examples? • In general, the longer the period, the more elastic all factors are • Except for land! less elastic • Compare tax on soda to tax on sugar

Admin RFHPG Tax Types 3 Rules Extensions GE Tax General Equilibrium Issues: Scope

• Scope of tax matters: elasticity of response to tax on restaurants in Lexington is diﬀerent than tax on restaurants in Massachusetts • Is the supply of workers for the state-wide tax more or less elastic? Admin RFHPG Tax Types 3 Rules Extensions GE Tax General Equilibrium Issues: Scope

• Scope of tax matters: elasticity of response to tax on restaurants in Lexington is diﬀerent than tax on restaurants in Massachusetts • Is the supply of workers for the state-wide tax more or less elastic? less elastic • Compare tax on soda to tax on sugar Admin RFHPG Tax Types 3 Rules Extensions GE Tax General Equilibrium Issues: Cross-Product Market Eﬀects

• Tax from one market could spill over in another – examples? • Textbook uses restaurant meals and babysitters • Think tax on internet and Netﬂix usage Admin RFHPG Tax Types 3 Rules Extensions GE Tax Today: Tax Incidence

• Tax incidence: who bears the burden of the tax 1. Statutory incidence 6= economic incidence 2. Without impediments, side of the market on which the tax is levied does not impact incidence 3. More elastic factor bears the burden of the tax • When there are impediments to reaching market equilibrium, which side of the market bears the tax matters • General equilibrium tax incidence: the most inelastic factor bears the burden Admin RFHPG Tax Types 3 Rules Extensions GE Tax Next Class

• Last full lecture • Gruber Chapter 12: Social insurance