Applying Supply Demand Analysis The Case of Excise Taxes US Taxation Federal state and local taxation Income taxes Excise taxes Corporate taxes Tariffs Estate and gift taxes Property taxes US Federal Taxation Income tax Taxes personal income from wages salaries investments business activities 42 of federal tax revenue Payroll tax An excise tax on wage and salaries 36 of federal tax revenue Corporate tax Taxes firms profits 10 of federal tax revenue Tariffs estate gift and other excise taxes provide the rest of federal tax revenue Excise Taxes An EXCISE TAX is levied on purchases E g sales taxes real estate transfer taxes Payroll tax is an excise tax on purchases of labor All combined excise taxes provide the Federal Government with about 41 of its total tax revenue Excise Taxes An EXCISE TAX is levied on purchases E g sales taxes real estate transfer taxes Payroll tax is an excise tax on purchases of labor All combined excise taxes provide the Federal Government with about 41 of its total tax revenue What happens when an excise tax is imposed on a competitive market Excise Taxes Tax rate is t for each commodity unit traded Price faced by buyers is pb Price faced by sellers is ps Excise Taxes Tax rate is t for each commodity unit traded Price faced by buyers is pb Price faced by sellers is ps With no tax pb ps With the tax pb Excise Taxes Tax rate is t for each commodity unit traded Price faced by buyers is pb Price faced by sellers is ps With no tax pb ps With the tax pb ps t Excise Taxes Tax rate is t for each commodity unit traded Price faced by buyers is pb Price faced by sellers is ps With no tax pb ps With the tax At equilibrium quantity demanded at price pb must quantity supplied at price ps pb ps t Excise Taxes Tax rate is t for each commodity unit traded Price faced by buyers is pb Price faced by sellers is ps With no tax pb ps With the tax At equilibrium quantity demanded at price pb must equal quantity supplied at price ps pb ps t p Figure 1 The Competitive Market with No Tax pe Qe QD QS Figure 1 The Competitive Market with No Tax p i pb ps pe ii Quantity demanded at pe equals quantity supplied at pe pe Qe QD QS Figure 2 The Competitive Market with a 3 Excise Tax p i pb ps 3 pb pe 3 ps Qt Qe QD QS Figure 2 The Competitive Market with a 3 Excise Tax p i pb ps 3 ii Quantity demanded at pb pb pe 3 ps Qt Qe QD QS Figure 2 The Competitive Market with a 3 Excise Tax p i pb ps 3 ii Quantity demanded at pb equals quantity supplied at ps pb pe 3 ps Qt Qe QD QS Excise Taxes An Example QD 100 2pb QS 20 ps Excise Taxes An Example QD 100 2pb QS 20 ps With no tax the buyer and seller prices are Excise Taxes An Example QD 100 2pb QS 20 ps With no tax the buyer and seller prices are equal pb ps pe Excise Taxes An Example QD 100 2pb QS 20 ps With no tax the buyer and seller prices are equal pb ps pe The market equilibrium is computed by Excise Taxes An Example QD 100 2pb QS 20 ps With no tax the buyer and seller prices are equal pb ps pe The market equilibrium is computed by QD 100 2pe 20 pe QS pe Excise Taxes An Example QD 100 2pb QS 20 ps With no tax the buyer and seller prices are equal pb ps pe The market equilibrium is computed by QD 100 2pe 20 pe QS pe 40 unit Quantity traded with no tax is Qe Excise Taxes An Example QD 100 2pb QS 20 ps With no tax the buyer and seller prices are equal pb ps pe The market equilibrium is computed by QD 100 2pe 20 pe QS pe 40 unit Quantity traded with no tax is Qe 20 units Figure 3 The Competitive Market with No Tax p i pb ps pe ii Quantity demanded at 40 equals quantity supplied at 40 40 pe Qe 20 QD QS Excise Taxes An Example QD 100 2pb QS 20 ps t 3 unit Excise Taxes An Example QD 100 2pb QS 20 ps t 3 unit pb Excise Taxes An Example QD 100 2pb QS 20 ps t 3 unit pb ps 3 Excise Taxes An Example QD 100 2pb QS 20 ps t 3 unit pb ps 3 The market must clear so Excise Taxes An Example QD 100 2pb QS 20 ps t 3 unit pb ps 3 The market must clear so QD 100 2pb 20 ps QS Excise Taxes An Example QD 100 2pb QS 20 ps t 3 unit pb ps 3 The market must clear so QD 100 2pb 20 ps QS QD 100 2 ps 3 20 ps QS ps Excise Taxes An Example QD 100 2pb QS 20 ps t 3 unit pb ps 3 The market must clear so QD 100 2pb 20 ps QS QD 100 2 ps 3 20 ps QS ps 38 unit The market clearing buyers price is pb Excise Taxes An Example QD 100 2pb QS 20 ps t 3 unit pb ps 3 The market must clear so QD 100 2pb 20 ps QS QD 100 2 ps 3 20 ps QS ps 38 unit The market clearing buyers price is pb 38 3 41 unit Excise Taxes An Example QD 100 2pb QS 20 ps t 3 unit ps 38 unit and pb 41 unit Quantity demanded is QD Quantity supplied is QS Quantity traded is Qt Excise Taxes An Example QD 100 2pb QS 20 ps t 3 unit ps 38 unit and pb 41 unit Quantity demanded is QD 18 units Quantity supplied is QS 18 units Quantity traded is Qt 18 units Figure 4 The Competitive Market with a 3 Excise Tax p i pb ps 3 ii Quantity demanded at 41 equals quantity supplied at 38 41 pb 40 pe 3 38 ps Qt 18 Qe 20 QD QS Excise Taxes An Example What are the main effects of the tax Excise Taxes An Example What are the main effects of the tax Buyers price rises Sellers price falls Quantity traded falls Excise Taxes An Example Who pays the 3 tax Excise Taxes An Example Who pays the 3 tax Buyers pay of the tax Sellers pay of the tax Excise Taxes An Example Who pays the 3 tax Buyers pay 41 40 1 of the tax Sellers pay 40 38 2 of the tax Exercise on Computing Equilibrium with an Excise Tax QD 500 3pb and QS 100 2ps With no tax pb ps and the quantity traded is Exercise on Computing Equilibrium with an Excise Tax QD 500 3pb and QS 100 2ps With no tax pb ps 120 unit and the quantity traded is 140 units Exercise …