08applications_taxation.ppt

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1、8Application: The Costs of Taxation Application: The Costs of Taxation Welfare economics is the study of how the allocation of resources affects economic well-being.lBuyers and sellers receive benefits from taking part in the market. lThe equilibrium in a market maximizes the total welfare of buyers

2、 and sellers. THE DEADWEIGHT LOSS OF TAXATION How do taxes affect the economic well-being of market participants?THE DEADWEIGHT LOSS OF TAXATION It does not matter whether a tax on a good is levied on buyers or sellers of the good . . . the price paid by buyers rises, and the price received by selle

3、rs falls.Figure 1 The Effects of a TaxSize of taxQuantity0PricePrice buyerspayPrice sellersreceiveDemandSupplyPricewithout taxQuantitywithout taxQuantitywith taxHow a Tax Affects Market Participants A tax places a wedge between the price buyers pay and the price sellers receive. Because of this tax

4、wedge, the quantity sold falls below the level that would be sold without a tax. The size of the market for that good shrinks.How a Tax Affects Market Participants Tax RevenuelT = the size of the taxlQ = the quantity of the good soldT Q = the governments tax revenueFigure 2 Tax RevenueTaxrevenue (T

5、Q)Size of tax (T)Quantitysold (Q)Quantity0PriceDemandSupplyQuantitywithout taxQuantitywith taxPrice buyerspayPrice sellersreceiveFigure 3 How a Tax Affects Welfare AFBDCE Quantity0Price DemandSupply= PBQ2= PSPricebuyerspayPricesellersreceive= P1Q1Pricewithout taxHow a Tax Affects Market Participants

6、 Changes in WelfarelA deadweight loss is the fall in total surplus that results from a market distortion, such as a tax. Question: Is deadweight loss related to how the tax be levied? How a Tax Affects WelfareHow a Tax Affects Market Participants The change in total welfare includes:lThe change in c

7、onsumer surplus,lThe change in producer surplus, andlThe change in tax revenue.lThe losses to buyers and sellers exceed the revenue raised by the government.lThis fall in total surplus is called the deadweight loss.Deadweight Losses and the Gains from Trade Taxes cause deadweight losses because they

8、 prevent buyers and sellers from realizing some of the gains from trade.Figure 4 The Deadweight LossCost tosellersValue tobuyersSize of taxQuantity0PriceDemandSupplyLost gainsfrom tradeReduction in quantity due to the taxPricewithout taxQ1PBQ2PSDETERMINANTS OF THE DEADWEIGHT LOSS What determines whe

9、ther the deadweight loss from a tax is large or small?lThe magnitude of the deadweight loss depends on how much the quantity supplied and quantity demanded respond to changes in the price. lThat, in turn, depends on the price elasticities of supply and demand.Figure 5 Tax Distortions and Elasticitie

10、s(a) Inelastic SupplyPrice0QuantityDemandSupplySize of taxWhen supply isrelatively inelastic,the deadweight lossof a tax is small.Figure 5 Tax Distortions and Elasticities(b) Elastic SupplyPrice0QuantityDemandSupplySizeoftaxWhen supply is relativelyelastic, the deadweightloss of a tax is large.Figur

11、e 5 Tax Distortions and ElasticitiesDemandSupply(c) Inelastic DemandPrice0QuantitySize of taxWhen demand isrelatively inelastic,the deadweight lossof a tax is small.Figure 5 Tax Distortions and Elasticities(d) Elastic DemandPrice0QuantitySizeoftaxDemandSupplyWhen demand is relativelyelastic, the dea

12、dweightloss of a tax is large.DETERMINANTS OF THE DEADWEIGHT LOSS The greater the elasticities of demand and supply:l the larger will be the decline in equilibrium quantity and,l the greater the deadweight loss of a tax.DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY The Deadweight Loss DebatelSome ec

13、onomists argue that labor taxes are highly distorting and believe that labor supply is more elastic.lSome examples of workers who may respond more to incentives: Workers who can adjust the number of hours they work Families with second earners Elderly who can choose when to retire Workers in the und

14、erground economy (i.e., those engaging in illegal activity)DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY With each increase in the tax rate, the deadweight loss of the tax rises even more rapidly than the size of the tax.Figure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different SizesTax

15、 revenueDemandSupplyQuantity0PriceQ1(a) Small TaxDeadweightlossPBQ2PSFigure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different SizesTax revenueQuantity0Price(b) Medium TaxPBQ2PSSupplyDemandQ1DeadweightlossFigure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different SizesTax re

16、venueDemandSupplyQuantity0PriceQ1(c) Large TaxPBQ2PSDeadweightlossDEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY For the small tax, tax revenue is small. As the size of the tax rises, tax revenue grows. But as the size of the tax continues to rise, tax revenue falls because the higher tax reduces the

17、 size of the market.Figure 7 How Deadweight Loss and Tax Revenue Vary with the Size of a Tax(a) Deadweight LossDeadweightLoss0Tax Size(b) Revenue (the Laffer curve)TaxRevenueTax Size0DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY As the size of a tax increases, its deadweight loss quickly gets larger

18、. By contrast, tax revenue first rises with the size of a tax, but then, as the tax gets larger, the market shrinks so much that tax revenue starts to fall.CASE STUDY: The Laffer Curve and Supply-side Economics The Laffer curve depicts the relationship between tax rates and tax revenue. Supply-side

19、economics refers to the views of Reagan and Laffer who proposed that a tax cut would induce more people to work and thereby have the potential to increase tax revenues.The General Lesson How much revenue the government gains or loses from a tax change cannot be computed just by looking at tax rates.

20、 It also depend on how the tax change affects peoples behavior.Summary A tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenues raised by the government. The fall in total surplusthe sum of consumer surplus

21、, producer surplus, and tax revenue is called the deadweight loss of the tax.Summary Taxes have a deadweight loss because they cause buyers to consume less and sellers to produce less. This change in behavior shrinks the size of the market below the level that maximizes total surplus.Summary As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. Tax revenue first rises with the size of a tax. Eventually, however, a larger tax reduces tax revenue because it reduces the size of the market.