150121W this section summary reviewed and sequence reposted Summarized from Gregory Mankiw’s Principles of Economics PART 4 The Economics of the Public Sector Chapter 12 of 36 – The Design of the Tax System - section 10 … Figure 3 from Chapter 8 here again … Figure 3 from Chapter 8 – How a Tax Affects Welfare A tax on a good reduces • consumer surplus by the area B + C • producer surplus by the area D + E Because the fall in producer and consumer surplus • exceeds tax revenue area B + D • the tax imposes a deadweight loss area C + E … The primary aim of a tax system is to raise revenue for the government. When designing a tax system, policymakers have two objectives • maximize efficiency • maximize equity One tax system is more efficient than another if • it raises the same amount of revenue • at a smaller cost to taxpayers The costs of taxes to taxpayers are • the tax payment itself • deadweight losses resulting when taxes distort decisions people make • administrative burdens of both government and taxpayers Because taxes distort incentives, they create deadweight losses. If the government • taxes housing, people live in smaller houses and spend more of their income on other things • taxes labor earnings, people work less and spend more time on leisure Figure 3 from Chapter 8 summarizes deadweight loss caused by a tax on a good. The deadweight loss of a tax is • the reduction in economic well-being of taxpayers • in excess of the amount of revenue raised by the government Deadweight loss is the inefficiency a tax creates • as people allocate resources according to the tax incentive • rather than the true costs and benefits of the goods and services they buy and sell Joe values a pizza at $8, and Jane values it at $6. The price of pizza is $5, so both Joe and Jane will buy one. Both Joe and Jane get a value surplus over the amount they pay • Joe gets consumer surplus of $8 - $5 = $3 • Jane gets consumer surplus of $6 - $5 = $1 • total consumer surplus is $4 Then government levies a $2 tax on pizza • the price of pizza rises to $5 + $2 = $7 • Joe still buys a pizza, but now receives a consumer surplus of only $8 - $7 = $1 • Jane decides not to buy a pizza because the $7 price is higher than its $6 value to her • total government tax revenue is $2, on Joes pizza Before the new tax, government tax revenue + consumer surplus = $0 + $4 = $4 After the new tax, government tax revenue + consumer surplus = $2 + $1 = $3 In this case the deadweight loss caused by the tax is $4 - $3 = $1 The deadweight loss occurs because the tax causes Jane to alter her behavior, she no longer buys pizza. When the tax raises the price of pizza • Joe and especially Jane are worse off • there is deadweight loss in the economy … the tax raises the price of pizza el impuesto aumenta el precio de la pizza 税はピザの価格を上昇させる ぜいはピザのかかくをじょうしょうさせる 上昇 - じょうしょう - rise
Posted on: Wed, 21 Jan 2015 10:55:00 +0000
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