TaxationLesson 1 of 2 in the course Value-added tax

Tax Incidence: Market Adjustment, Elasticity, and Distribution

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Tax incidence is about who ultimately bears the economic cost of a tax, not simply who sends the payment to the government. This distinction matters when evaluating fairness, policy effects, and the distribution of resources among people and social groups.

Nominal incidence identifies the person or organization legally responsible for remitting a tax. Real incidence, also called economic incidence, identifies the people who ultimately bear the burden after prices, wages, and other market outcomes adjust.

All flashcards

What is nominal tax incidence?
The legal assignment of responsibility for paying or remitting a tax.
What is real tax incidence?
The distribution of a tax’s economic burden after market outcomes adjust.
What is a specific tax?
A fixed amount charged per unit.
What principle predicts which side bears more of a tax?
The less price-responsive side of the market tends to bear more.
What is budget incidence?
An analysis of tax costs together with the benefits of government spending or transfers.

Quiz questions

  1. In a competitive market, what can happen if a tax is legally imposed on buyers rather than sellers?Answer: Demand shifts, but the market can reach the same prices and quantity as when sellers remit the tax.
  2. How is an ad valorem tax defined?Answer: A tax charged as a percentage of the price.
  3. In a competitive-market model, if PED=−0.4PED=-0.4 and PES=0.5PES=0.5, approximately what fraction of the tax is passed through to buyers?Answer: About 56%.
  4. Why can tax revenue alone understate the economic cost of a tax?Answer: A tax can eliminate transactions and reduce consumer and producer surplus beyond the revenue collected.
  5. What does a country's tax-to-GDP ratio measure?Answer: Tax revenue as a share of gross domestic product.

Based on the Wikipedia article Tax incidence, licensed CC BY-SA 4.0. Adapted into a summary, flashcards and quizzes.

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