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CHAPTER 14

CHAPTER 14. TAXATION AND INCOME DISTRIBUTION. 0. Vocabulary. Statutory Incidence Economic Incidence Tax Shifting Partial Equilibrium Models. Tax Incidence: General Remarks. Only people can bear taxes Functional distribution of income Size distribution of income

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CHAPTER 14

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  1. CHAPTER 14 TAXATION AND INCOME DISTRIBUTION

  2. 0 Vocabulary • Statutory Incidence • Economic Incidence • Tax Shifting • Partial Equilibrium Models

  3. Tax Incidence: General Remarks • Only people can bear taxes • Functional distribution of income • Size distribution of income • Both sources and uses of income should be considered • Incidence depends on how prices are determined • Incidence depends on the disposition of tax revenues • Balanced-budget tax incidence • Differential tax incidence • Lump-sum tax • Absolute tax incidence

  4. Average tax rate versus marginal tax rate Proportional tax system Progressive tax system Regressive tax system Tax Progressiveness Can Be Measured in Several Ways

  5. Measuring How Progressive a Tax System is

  6. Measuring How Progressive a Tax System is – A Numerical Example

  7. $ 0 Partial Equilibrium Models $1.20 $1.40 $1.00 $1.20 S1 S0 D0 Quantity D1

  8. $ 0 SX S PerfectlyInelasticSupply DX’ DX Quantity

  9. $ 0 S PerfectlyElasticSupply SX DX’ DX Quantity

  10. Ad Valorem Taxes Sf Price per Pound of food Pr P0 Pm Df Df’ Qm Pounds of food per year Q0 Qr

  11. Taxes on Factors • The Payroll Tax • Capital Taxation in a Global Economy

  12. Commodity Taxation without Competition • Monopoly • Oligopoly

  13. Profits Taxes • Economic profit • Perfect competition • Monopoly • Measuring economic profit

  14. Tax Incidence and Capitalization PR = $R0 + $R1/(1 + r) + $R2/(1 + r)2 + … + $RT/(1 + r)T PR’ = $(R0 – u0) + $(R1 – u1)/(1 + r) + $(R2 – u2)/(1 + r)2 + … + $(RT – uT)/(1 + r) u0 + u1/(1 + r) + u2/(1 + r)2 + … + uT/(1 + r)T Capitalization

  15. General Equilibrium Models • Partial equilibrium • General equilibrium

  16. Tax Equivalence Relations tKF = a tax on capital used in the production of food tKM = a tax on capital used in the production of manufactures tLF = a tax on labor used in the production of food tLM = a tax on labor used in the production of manufactures tF = a tax on the consumption of food tM = a tax on consumption of manufactures tK = a tax on capital in both sectors tL = a tax on labor in both sectors t = a general income tax

  17. Tax Equivalence Relations • Partial factor taxes

  18. The Harberger Model • Assumptions • Technology • Elasticity of substitution • Capital intensive • Labor intensive • Behavior of factor suppliers • Market structure • Total factor supplies • Consumer preferences • Tax incidence framework

  19. Analysis of Various Taxes • Commodity tax (tF) • Income tax (t) • General tax on labor (tL) • Partial factor tax (tKM) • Output effect • Factor substitution effect

  20. Some Qualifications • Differences in individuals’ tastes • Immobile factors • Variable factor supplies

  21. An Applied Incidence Study Table 14.3 Average federal tax rates and share of federal taxes by income quintile (2006)

  22. The Payroll Tax SL Wage rate per hour Pr wg = w0 wn DL DL’ L0 = L1 Hours per year

  23. Monopoly $ MXX EconomicProfits EconomicProfits after unittax c a P0 ATCX Pn i f g d h b ATC0 DX DX’ MRX X per year X0 X1 MRX’

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