Tax Incidence ADE Fall

Transcription

1 Tax Incidence ADE Fall Department of Public Economics 1

2 Bibliography Rosen and Gayer Chapter 14 2

3 1. Introduction to Tax Incidence Statutory incidence who is legally responsible for the tax. Economic incidence change in the distribution of private real income induced by a tax. Tax shifting The difference between statutory and economic incidence 3

4 1. Introduction to Tax Incidence Statutory Incidence Only people can bear taxes: as owners of factors of production (capital and labor); as consumers. but a corporation cannot. People are shareholders, workers, landlords, consumers, 4

5 1. Introduction to Tax Incidence Example I The beer tax. The government imposes a unit beer tax (10 cents/beer) from 2016 onwards. Price of one unit in a given bar in 2015: 1 What happens after New Year's Eve: Possibility 1: The price is the same in 2016 as in 2015, i.e. 1 Possibility 2: The price increased by the amount of the tax to 1,10 Possibility 3: The price increased by less than the tax to 1,05 5

6 1. Introduction to Tax Incidence Statutory Incidence: Who bears the tax in case 1, 2, and 3 (given that demand and supply does not change)? Note: people might adjust demand and supply. Economic Incidence: Distributional effect: Depends on spending patterns. If demand decreases, markets of beer ingredients are also affected. 6

7 1. Introduction to Tax Incidence Example II Let s tax Repsol: Repsol profits tripled in 2010 to 4.7 billion. Let s raise taxes on petrol companies. Is this a good idea? The concept of tax incidence allows us to consider who will pay our new petrol company tax. The simplest notion of tax incidence (statutory incidence) concerns the question of who is assessed to pay a tax. the statutory incidence of a petrol tax falls on the petrol company. 7

8 1. Introduction to Tax Incidence The statutory incidence may not be informative from an economic point of view: the petrol company may pass on an increase in tax in the form of higher prices and so shifts the burden of the tax on to the consumer (forward shifting of the tax burden). It is therefore important to consider the effective incidence or economic incidence of a tax. the effective incidence of the petrol tax falls on the (final) consumer. people with cars, people who take the bus, consumers of transported goods. 8

9 1.1 Types of Models I) Partial Equilibrium Models Models take into account only the market in which the tax is imposed and ignore ramifications in other markets. appropriate for small markets given the size of the economy. based on demand and supply in competitive equilibrium. II) General Equilibrium Models Models which also take into account the possible spillover effects in other markets. 9

10 2. Taxation in partial equilibrium location on the demand curve depends on income and prices. For a given change in a tax there can be I. income effect II. substitution effect Example: Increase in the price of meat It may encourage consumers to switch to alternative food sources, such as buying vegetables (substitution effect). It also means that after buying some meat, they will have lower spare income. Therefore, consumers will buy less meat because this effect on income (income effect). 10

11 2. Taxation in partial equilibrium location on the demand curve depends on income and prices. For a given change in a tax there can be I. income effect II. substitution effect simplified models of the reality. explain the short-term effect. 11

12 2.1 Unit Tax on Commodities Unit Tax: fixed amount per unit of a commodity sold example: 10 cents per beer. Tax Wedge (deviation from equilibrium): how price paid by consumers and price received by producers differ. statutory incidence can be on producers or consumers Bar is responsible to pay the tax vs. Consumer of beer is responsible to pay the tax 12

13 2.1 Unit Tax on Commodities Example: Statutory incidence on consumers P S 0 E 0 P 0 D 0 Q o Q Figure 1: Market for good X before the tax 13

14 2.1 Unit Tax on Commodities Example: Statutory incidence on consumers P t S 0 E 0 P 0 D 0 Q o Q Figure 2: Impact of the tax on effective demand for X 14

15 2.1 Unit Tax on Commodities Example: Statutory incidence on consumers P P D S 0 E 0 P 0 P S D 0 D 1 Q 1 Q o Q Figure 3: Incidence of a unit tax on the consumption 15

16 2.1 Unit Tax on Commodities Example: Statutory incidence on consumers The statutory incidence is t on the consumer. Economic incidence: Δ P S producer = P 0 P S Δ P D consumer = P D P 0 t = (P 0 P S )+(P D P 0 ) T = Tax revenue = t * Q1 Incidence: (P 0 PS) t (PD P 0) t Proportion of the tax borne by producers Proportion of the tax borne by consumers 16

17 2.2 Unit Tax on Commodities Example: Statutory incidence on producers P S 1 t S 0 E 0 P 0 D 0 Q o Q Figure 4: The impact of the tax on of the effective supply (S1) 17

18 2.2 Unit Tax on Commodities Example: Statutory incidence on producers P S 1 P 1 S 0 P 0 E 0 P S D 0 Q 1 Q o Q 18 Figure 5: The impact of the tax on of the effective supply (S1)

19 2.2 Unit Tax on Commodities Example: Statutory incidence on producers The statutory incidence is t on the producer. Economic incidence: Δ P S producer = P 0 P S Δ P D consumer = P D P 0 t = (P 0 P S )+(P D P 0 ) T = Tax revenue = t * Q1 Incidence: (P 0 PS) t (PD P 0) t Proportion of the tax borne by producers Proportion of the tax borne by consumers 19

20 2.2 Unit Tax on Commodities Statutory incidence Implication I: The economic incidence of a unit tax is independent of its statutory incidence. 20

21 2.3 Taxation in partial equilibrium: Price elasticity What determines the share of the tax borne by the producer? The government implements a unit tax on every unit manufactured. The statutory tax is on the producer. How can we know if the producer will shift the tax incidence to the consumer? 21

22 2.3 Price elasticity of demand The price elasticity of demand tells us how sensitive the demand for a good is to changes in the price of that good. If demand is very elastic, it means a small change in price will produce a large change in the quantity demanded. If demand is very inelastic, it means a small change in price will produce a small change in the quantity demanded. The elasticity is unitless (measures in %) so we can compare elasticities across different goods. Price elasticity of the demand: p q q p p 22

23 2.2 Unit Tax on Commodities Example: Statutory incidence on producers with perfectly inelastic demand P P D P 0 =P S E 0 D 0 t S 1 S 0 P S = P 0 P D = P 0 + t Tax completely borne by the consumer Q o =Q 1 Q Figure 6: Incidence of a tax on the production, in a market 23 with perfectly inelastic demand

24 2.2 Unit Tax on Commodities Example: Statutory incidence on producers with perfectly elastic demand P P S = P 0 - t P d = P 0 t S 1 S 0 Tax completely borne by the producer P 0 =P S E 0 D 0 P S Q 1 Q o Q Figure 7: Incidence of a tax on the production on the production in a market with perfectly elastic demand 24

25 Bottom line When supply is inelastic or demand is elastic: the seller suffers the major tax burden; when supply is elastic or demand is inelastic: the buyer pays most of the tax 25

26 2.4 Ad Valorem Taxes Ad valorem tax: tax with a rate given as proportion of the price example: 21 percent per Euro VAT (IVA) is an example of this sort of tax. 26

27 2.4 Ad Valorem Taxes Example: Statutory incidence on producers P S 1 =S 0 *t P d S 0 P 0 P s D B A Q Figure 9: Impact on the effective demand curve of an advalorem tax = t 27

28 2.6 General Equilibrium Ignoring feedback into other markets provides and incomplete picture of tax incidence if markets are relatively large. Trace out full incidence of taxes back to original owners of factors Partial equilibrium: producer vs. consumer General equilibrium: capital owners vs. labor vs. landlords, etc. Workhorse analytical model: Harberger (1962): 2 sector and 2 factors of production 31