01:220:102 Lecture Notes - Lecture 12: Economic Surplus, Deadweight Loss
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Econ 102- Taxes Chapter 7 Continued
• Taxes drive a wedge between the price buyers pay and the price sellers receive
o To analyze the effects, we’ll graph two scenarios
▪ When tax is levied on sellers
▪ When the tax is levied on buyers
o The incidence of a tax is a measure of who really pays it
• The buyer is still paying a total of $10 if the seller is only receiving $8 because the
government takes $2 for taxes (theoretically)
Excise Tax Imposed on Hotel Owners (Slide 6)
Excise tax Imposed on Hotel Guests (Slide 7)
• The incidence of an excise tax doesn’t depend on who officially pays the tax
• All depends on elasticity of buyer and seller regarding hotel rooms
• Gasoline is an example of something very inelastic because there are not much
replacement methods, so if the seller raises prices the buyer will continue to buy
How Not to tax
• A pleasure boat seems like a good thing to tax…. But is it?
• The omnibus budget reconciliation act of 1990 applied a 10% federal luxury tax to the
retail sale of luxury goods like pleasure boats with a sales price above $100,000
• Expected tax revenue: $9 Billion
o This tax was created to only affect the higher class people because idea was that
only a small amount of people are wealthy enough to afford a 100k boat
o This turned out that these boats had a replacement, making it inelastic
o They traveled elsewhere to buy these high end boats and not pay the 10% luxury
tax
▪ For that extra $100,000 a wealthy person can travel to Italy and get a
boat for less and a vacation
• The reality: The federal luxury tax was repealed in 1993
o Sales of boats went down 52.7%; net 30,000 jobs were lost; and the federal
government paid out more than 7 million more in unemployment benefits to those
workers than it collected in tax revenue
When An excise tax is paid mainly by consumers (Slide 11)
• When the price elasticity of demand is low and the price elasticity of supply is high, the
burden of an excise tax falls mainly on consumers
This Photo by Unknown Author is licensed
Document Summary
Excise tax imposed on hotel owners (slide 6) How not to tax: a pleasure boat seems like a good thing to tax . When an excise tax is paid mainly by consumers (slide 11: when the price elasticity of demand is low and the price elasticity of supply is high, the burden of an excise tax falls mainly on consumers. This photo by unknown author is licensed under cc by. The revenue from an excise tax (slide 16: the tax revenue collected = per room x 5,000 rooms = ,000. Increasing tax rate does not necessarily increase revenue because people will change their behavior and find alternatives: luxury boat example is extreme instance of this. Increase in price does not always = higher revenue. The cost of taxation: administrative costs: the administrative costs of a tax are the resources used for its collection, for the method of payment, and for any attempts to evade the tax.
