Tax Incidence
Tax incidence: final resting place of a tax (either on consumers or producers); the person or group that ends up paying a tax.
Division of burden: due to elasticity of a product,consumers and producer together shoulders the tax burden. Producers pay in the form of a lower after-tax per-unit revenue, and consumers in a higher price
->this results in equilibrium quantity declines, price increases

Elasticity
DEMAND:

• Elastic demand: a small portion of tax burden is shifted to consumers, most to producers
  • big decline in equilibrium quantity
  • larger efficiency loss
    

• Inelastic demand:a large portion of tax burden is shifted to consumers, a small amount to producers
  • Small decline in equilibrium quantity
  • Revenue-seeking legislatures pick inelastic goods to place heavy excise taxes
  • Tax does not reduce sales by much, so tax revenue stays high
  • If the government was solely looking to increase its revenue from the tax the most, the tax would be perfectly inelastic (Rainbow book p. 309 Q 23).
  • Ex) When a tax is placed on cigarettes (relatively inelastic due to addiction), the consumers will continue to purchase the cigarettes even though the price is higher because they have a nicotine addiction
    

SUPPLY:
with a specific supply, the more inelastic the demand for the product, the larger is the portion of the tax shifted to consumers.

• Elastic supply: producers shift most of the tax to consumers and bear only a small portion themselves
  • more decline in equilibrium quantity, more increase in price
  • larger efficiency loss
    

• Inelastic supply: Producers take greater burden of tax
  • less decline in equilibrium quantity, less increase in price
  • less efficiency loss

Efficiency Loss of a Tax
Tax Revenues

• The government uses tax revenues to fund public goods and services
  • The transfer of dollars from consumers and producers involves no loss of well being to society
    

Efficiency Loss

• Taxes result in society sacrificing net benefit, because the tax reduces production and consumption of the product below their levels of economic efficiency where MB = MC
  

Role of Elasticities

• More elastic demand or supply results in greater efficiency loss
• More inelastic demand or supply results in less efficiency loss

	Elastic	Inelastic
Demand	- Consumer pay less - Producer pay more	- Consumer pay more - Producer pay less
Supply	- Consumer pay more - Producer pay less	- Consumer pay less - Producer pay more
Efficiency loss	Greater efficiency loss	Less efficiency loss

Qualifications
NOTE: the equilibrium price does not reduce at the same amount the tax is levied


Probable Incidence of US Taxes

• Personal income tax:
  • Although the burden of this tax lies mainly on the person, there are ways that individuals and shift the incidence
    • ex: doctors, lawyers, dentists, can increase their fees
    • Unions can strengthen bargaining resolve for higher wages
• Corporate income tax:
  • Generally, firms will not change their profit-maximizing price or output due to the tax
  • However, in a small market, producers can shift part of the corporate tax to consumers through higher prices, or shift the tax to suppliers through lower prices and wages - this occurs when the firm has monopoly power or monopsonistic power
• Sales and excise taxes:
  • Sales taxes normally are shifted to consumers
  • Specific excise taxes may or may not be shifted to consumers, depending on the elasticities of demand and supply
• Property Taxes:

• Property owners bear the burden of many property taxes as there are no other parties that the tax can be shifted to
  • This is true when it comes to taxes on land, personal property and owner-occupied residences
    
  • Even when the land is sold, property tax is probably not going to shift
  • What the buyer is willing to pay for the land reflects the buyer's understanding that future taxes would have to be paid on it. (When the buyer comes up with an offer, he holds in consideration the expected taxation)
• Taxes on rented property are usually shifted entirely or partly from the owner to the tenant
  • This is done by increasing rent.
• Taxes on business property are treated as a business cost
  • When establishing product prices, the business property taxes are taken into account (This means that these taxes are usually shifted to the firm's customers.)

The US Tax Structure
Although whether or not the US tax structure combined is progressive, regressive or proportional, the majority agrees on the following:

1. Federal tax system is progressive. While Federal payroll taxes and excise taxes are regressive, the overall Federal tax rate is progressive. The rate could be found by dividing the total tax with a person's income.
2. State and local taxes are regressive. These are taxes like the sales tax so the tax rates fall as the income increases. They are also less progressive than the Federal taxes.
3. Overall, the US tax structure is slightly progressive because people with higher income has to pay a slightly larger amount in taxes
4. Personal Income tax (the household or individual on which it is levied): Progressive
5. Sales Taxes (consumers who buy the taxed products): Regressive.
6. Corporate Income Tax: Proportional.
7. Payroll Taxes: Regressive
8. Property Taxes: Regressive