Chapter 12 Taxation and Income Distribution
Chapter 12 Taxation and Income Distribution
I. Impact of taxes on income distribution hard to determine because of tax incidence
II. Tax Incidence
a. Who actually pays a tax
b. Legal Incidence – who is legally responsible for paying a tax
c. Economic Incidence – who actually pays the tax
d. Example – tax of $1 is placed on $10 item how is income distribution affected
i. Price stays at $10 – income of seller reduced ii. Prices rises to $11 – income of buyers reduced iii. Price rises to $10.30 – buyers pay $.30 and sellers pay $.70
e. To the extent taxes affect quantity sold and produced, tax affects income of suppliers of inputs for the product.
i. Example: tax on gasoline reduces gasoline consumption it reduces income of gasoline tanker truck owners and drivers.
ii. May reduce the income of furnace manufactures by reducing the price of heating fuel.
III. Tax Incidence Perspectives
a. People pay taxes not corporations
b. How to group people for purposes of tax incidence
i. Often think of producers and consumers
1. But consumers are also producers and producers are also consumers
2. 50 of households own stock directly, others own stock indirectly
ii. By income Rich, Middle Class, Poor
1. How do you define these categories?
c. Tax affect both suppliers of inputs and consumers of a product.
i. In practice tend to ignore one side and do analysis on the other
1. Tax in commodity ignore impacts on inputs
2. Tax on inputs, ignore impact on consumers
d. Incidence depends on how prices are determined
i. How taxes change prices determine who pays the
I. Impact of taxes on income distribution hard to determine because of tax incidence
II. Tax Incidence
a. Who actually pays a tax
b. Legal Incidence – who is legally responsible for paying a tax
c. Economic Incidence – who actually pays the tax
d. Example – tax of $1 is placed on $10 item how is income distribution affected
i. Price stays at $10 – income of seller reduced ii. Prices rises to $11 – income of buyers reduced iii. Price rises to $10.30 – buyers pay $.30 and sellers pay $.70
e. To the extent taxes affect quantity sold and produced, tax affects income of suppliers of inputs for the product.
i. Example: tax on gasoline reduces gasoline consumption it reduces income of gasoline tanker truck owners and drivers.
ii. May reduce the income of furnace manufactures by reducing the price of heating fuel.
III. Tax Incidence Perspectives
a. People pay taxes not corporations
b. How to group people for purposes of tax incidence
i. Often think of producers and consumers
1. But consumers are also producers and producers are also consumers
2. 50 of households own stock directly, others own stock indirectly
ii. By income Rich, Middle Class, Poor
1. How do you define these categories?
c. Tax affect both suppliers of inputs and consumers of a product.
i. In practice tend to ignore one side and do analysis on the other
1. Tax in commodity ignore impacts on inputs
2. Tax on inputs, ignore impact on consumers
d. Incidence depends on how prices are determined
i. How taxes change prices determine who pays the