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Taxation, Incidence, Distribution
Recap:
 The statutory burden of a tax does not describe who
really bears the tax.
 The side of the market on which the tax is imposed
is irrelevant to the distribution of tax burdens.
 Parties with inelastic supply or demand bear taxes;
parties with elastic supply or demand avoid them.
19 . 1
The Three Rules of Tax Incidence
The Statutory Burden of a Tax Does Not Describe Who
Really Bears the Tax
Example 1. Impact and incidence of a producer tax
on apples
• Demand for apples: Qd = 2000-100P
• Supply of Apples Qs = -100 + 200P
• A $2 per bushel tax is placed on producers
• a. who bears the statutory incidence of tax?
• b. who bears the economic incidence of the tax?
Cons. tax burden: pretax P-post-tax P + tax remitted
Prod. tax burden: post-tax P-pretax P + tax remitted
Taxation and Efficiency
Ch 15
Introduction
• Excess burden is a loss of welfare
above and beyond the tax revenues
collected.
• also refer as welfare cost or
deadweight loss
• Other Key Concepts:
– Consumer surplus, social surplus
Taxation and Economic Efficiency
Graphical Approach
20 . 1
Taxation and Economic Efficiency
Elasticities Determine Tax Inefficiency
The inefficiency of any tax is determined by the extent to which
consumers and producers change their behavior to avoid the tax;
deadweight loss is caused by individuals and firms making inefficient
consumption and production choices in order to avoid taxation.
20 . 1
Taxation and Economic Efficiency
Elasticities Determine Tax Inefficiency
Excess burden = ½ ηPgq1tg^2
Excess burden: loss of welfare above and beyond taxes collected
η = (eta) elasticity of demand
Pg = Price of gas
q1= pretax equilibrium quantity
tg ^2= tax rate
Excess Burden:
Airline ticket example
• Federal airline tax of 10%
• Value of tickets sold: $86 billion
• Price elasticity of D (η): 1.0
• Excess burden: ½ ηPaq1ta^2