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UB ECO 182 - 6. Applying_Supply_&_Demand_to_Excise_Taxes

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Applying Supply & Demand AnalysisUS TaxationUS Federal TaxationExcise TaxesSlide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Excise Taxes; An Example.Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Exercise on Computing Equilibrium with an Excise TaxSlide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Incidence of Excise TaxesSlide 50Slide 51Slide 52Slide 53Slide 54Slide 55Slide 56Slide 57Tax the Buyers, or Tax the Sellers?Slide 59Slide 60Slide 61Slide 62Slide 63Slide 64Slide 65Slide 66Slide 67Slide 68Slide 69Slide 70Applying Supply & Demand AnalysisThe Case of Excise TaxesUS TaxationFederal, state and local taxation.•Income taxes•Excise taxes•Corporate taxes•Tariffs•Estate and gift taxes•Property taxesUS 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, pb = ps + t.At equilibrium, quantity demanded at price pb must _____ quantity supplied at price 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 = ps + t.At equilibrium, quantity demanded at price pb must equal quantity supplied at price ps.QD,QSpQepeFigure 1Figure 1The Competitive Market with No TaxThe Competitive Market with No TaxQD,QSpQepeFigure 1Figure 1The Competitive Market with No TaxThe Competitive Market with No Tax(i) (i) ppbb = = ppss = = ppee(ii) Quantity demanded at (ii) Quantity demanded at ppee equals equals quantity supplied at quantity supplied at ppee..QD,QSpFigure 2Figure 2The Competitive Market with a $3 Excise TaxThe Competitive Market with a $3 Excise TaxQepepbpsQt(i) pb = ps + 3$3QD,QSpFigure 2Figure 2The Competitive Market with a $3 Excise TaxThe Competitive Market with a $3 Excise TaxQepepbpsQt(i) pb = ps + 3(ii) Quantity demanded at pb$3QD,QSpFigure 2Figure 2The Competitive Market with a $3 Excise TaxThe Competitive Market with a $3 Excise TaxQepepbpsQt(i) pb = ps + 3(ii) Quantity demanded at pb equals quantity supplied at ps.$3Excise 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 byQD = 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 byQD = 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 byQD = 100 – 2pe = – 20 + pe = QS  pe = $40/unitQuantity traded with no tax is Qe = 20 units.QD,QSp Qe= 20$40=peFigure 3Figure 3The Competitive Market with No TaxThe Competitive Market with No Tax(i) pb = ps = pe(ii) Quantity demanded at $40 equals quantity supplied at $40.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 soQD = 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 soQD = 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 soQD = 100 – 2pb = – 20 + ps = QS.QD = 100 – 2(ps + 3) = – 20 + ps = QS  ps = $38/unit.The market-clearing buyers’ price ispb = ??Excise Taxes; An Example.QD = 100 – 2pb. QS = – 20 + ps. t = $3/unit.pb = ps + 3.The market must clear soQD = 100 – 2pb = – 20 + ps = QS.QD = 100 – 2(ps + 3) = – 20 + ps = QS  ps = $38/unit.The market-clearing buyers’ price ispb = $38 + $3 = $41/unit.Excise Taxes; An Example.QD = 100 – 2pb. QS = – 20 +


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