1. Taxation, Prices Efficiency, and the Distribution of Income
Chapter 11
Taxation, Prices Efficiency, and the Distribution of Income
Copyright © 2002 Thomson Learning, Inc.
Thomson Learning™ is a trademark used herein under license.
ALL RIGHTS RESERVED. Instructors of classes adopting PUBLIC FINANCE: A CONTEMPORARY APPLICATION OF THEORY TO POLICY, Seventh Edition by David N. Hyman as an assigned textbook may reproduce material from this publication for classroom use or in a secure electronic network environment that prevents downloading or reproducing the copyrighted material. Otherwise, no part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including, but not limited to, photocopying, recording, taping, Web distribution, information networks, or information storage and retrieval systems—without the written permission of the publisher.
Printed in the United States of America
ISBN X

2. Plan 1-Impôt et efficacité 2-Incidence de l’impôt
3-Analyse en équilibre général
4-Distribution du revenu

3. 1- Impôt et efficacité L’impôt forfaitaire L’accise et l’éq. du marché
La surcharge de l’accise
L’importance de l’élasticité
Le coefficient d’inefficience
L’impôt ad valorem

4. L’impôt forfaitaire Lump-Sum Taxes
A Lump-sum (forfaitaire)tax is a fixed tax that is owed by everyone and is not subject to something taxpayers can change.
It is independent of income, consumption, or wealth.
An example is a Head Tax, which is constant for everyone.

5. Inefficiency in Taxation and the Lump-Sum Tax
Inefficiency in taxation results from the ability to avoid taxes by avoiding a taxed activity.
Because lump-sum taxes are unavoidable, they serve as the benchmark by which other taxes are measured.

6. Price Distorting Taxes
A price distorting tax is a tax that alters the relative price of goods.

7. Figure 11.1 A Price Distorting Tax Versus A Lump-Sum TaxB B' L' T Y* U3 U1 T U2
Expenditure on Other Goods
per Year (Dollars) YT E' E Y1
E'' QT QL Q1
Gasoline per Year (Gallons)

8. L’impôt spécifique et l’équilibre du marché Unit Taxes
A unit tax (spécifique) adds to the price by a fixed amount. Examples include the 32 cents per pack of cigarettes and 24 cents per gallon of gasoline in federal taxes.

9. Tax Terms The Gross Price (PG) is the price paid by consumers.
The Net Price (PN) is the price received by producers after the tax is paid.
PN = PG – T

10. Figure 11.2 Impact of A Unit Tax on Market Equilibrium
ST = MSC +
$0.25
S = MSC
D = MSB
Tax Revenue
1.15 = PG C
Excess Burden
T = $0.25
1.00 B
Price (Dollars)
0.90 = PN A DQ Q1 Q*
Gasoline per Year (Gallons)

11. =1/2 ×T2 × (Q*/P*) × (ESED)/(ES – ED)
La surcharge de l’impôt spécifique Excess Burden (surcharge) of a Unit Tax
DWL = 1/2TQ
=1/2 ×T2 × (Q*/P*) × (ESED)/(ES – ED)
A Step-by-step algebraic derivation is in the appendix to Chapter 11

12. Implication of the DWL Calculation
A doubling of the per unit tax quadruples the Deadweight Loss.
L’importance de l’élasticité

13. Figure 11.3 Excess Burden When Demand or Supply is Perfectly Inelastic
after Tax
Demand
Supply
Demand
Supply
Net Price
after Tax
Price
Price q q
Quantity per Month
Quantity per Month

14. Le coefficient d’inefficience Efficiency Loss Ratio of a Tax
The Efficiency Loss Ratio is the deadweight loss per dollar of revenue raised DWL/R .
Estimates of U.S. tax system place it between 25 and 40 cents per dollar of tax revenue raised.

15. L’impôt ad valorem Ad-Valorem Taxes
Ad-Valorem Taxes add a fixed percentage to the price of a good.
The primary example is sales taxes.

16. Excess burden of an Ad-valorem tax
DWL = 1/2 TQ
T = tPG
= 1/2 t2PG2(Q*/P*) × (ESED)/(ES – ED)
if t is very small, then this is approximately
= 1/2 t2P*Q*(ESED)/(ES – ED)

17. 2- Incidence de l’impôt Qu’est-ce que l’incidence ?
De quoi dépend l’incidence ?
Le cas du monopole

18. Incidence of a Tax
The Legal Incidence is the burden of a tax as determined by who is legally obligated to pay the tax. 
The Economic Incidence is the burden of a tax as determined by how much the parties are affected in terms of paying higher prices, or receiving lower prices.

19. Shifting of Taxes
Forward Shifting is the transfer of the burden of the tax from the seller, who is legally obligated to pay it, to the buyer. 
Backward Shifting is the transfer of the burden of the tax from the buyer, who is legally obligated to pay it, to the seller.

20. Using Excise Taxes on Alcohol to Internalize Externalities
Federal taxes on alcohol are per-unit rather than ad-valorem.
Externalities associated with alcohol are estimated at $0.48 per ounce (of hard liquor).

21. Figure 11.4 Impact of an Ad Valorem Tax on Labor
S’GROSS S
Excess
Burden
NET
D = Gross Wage A
WG = 5.20
5.00 E E'
WN = 4.16
Tax Revenue
Wages (Dollars) Q1 Q*
Labor Hours per Year

22. Independence of Legal and Economic Incidence
It does not matter whether the buyer or seller is legally liable for a tax.
The economic incidence of the tax is determined by supply and demand elasticities, the amount of the tax, and the original equilibrium price and quantity.

23. Figure 11.5 Incidence of a Tax Collected From Buyers
S = MSC
D = MSB
D' = MSB – T
PG + T =1.15 C
1.00 B
PG = 0.90 A
Price (Dollars) Q1 Q*
Price per Year (Gallons)

24. Gasoline per Year (Gallons)
Figure 11.6 The More Inelastic the Demand, the Greater the Portion of a Tax Borne by Buyers
S = MC + $0.25 D’
S = MC D E C
1.20
1.15
1.00 B
.95 A
Price (Dollars)
.90
DQ’
DQ’ Q1 Q2 Q*
Gasoline per Year (Gallons)

25. Figure 11.7 Impact of a Tax on a Good with a Perfectly Elastic Supply60
MC + T = S'
Price (Cents) E 50
MC = S' Q Q* 1
Housing per Month Square Feet

26. Figure 11.8 Tax Incidence When Market Supply is Perfectly Inelastic
D = W E W* G
tw* G
Wages (Dollars) F N G
W = W*
(1– t ) Q*
Labor Hours per Year

27. Shifting Under Imperfect Competition
Monopolists can shift less of a given tax forward to consumers than can competitive industry.

28. Figure 11.9 Shifting Under Monopoly
MC + T MR D MC
DPM
PMT PM P* T
DP*
Price P*
DQM
DQ*
QMT QM Q* T Q*
Output per Year

29. General Equilibrium Analysis and Shifting
When one good is taxed and another good is not taxed, the impact of the tax is not confined to the taxed good.
Because a tax on one good lowers the profit that can be made to firms producing it, they may shift their productive resources to the other good so as to maximize their after-tax rate-of-return in both markets.
This has the effect of equalizing the after-tax rate-of-return.

30. Figure 11.10 Multimarket Analysis of Excess BurdenDF DC E2 E2
PC(1 + t) S'
PF(1 + t) S' E1 E1 PC S
Price B PF S A
DQF
DQC
QF2
QF1
QC2
QC1
Clothing per Year

31. Figure 11.11 Multimarket Analysis IncidenceB
S' = MC + T S D S S' D E2 E1 PG P
Price P* E1 P' F E2 PN Q' Q* QF Q' F
Clothing per Year
Food per Year

32. Government Taxes and Expenditures and the Distribution of Income
The Tax Incidence is who bears the burden of a tax. 
The Expenditure Incidence is who receives the benefits of a government program.
The Budget Incidence is the net analysis of a program’s tax and expenditure incidence.
The Differential Tax Incidence is the change in the tax incidence that results from substituting one equal yield tax for another.

33. The Lorenz Curve
The Lorenz Curve maps the cumulative percentage of households against their cumulative percentage of income.

34. Line of Equal Distribution
Figure A Lorenz Curve
100 E
Line of Equal Distribution 75 60 y
Percentage of Real Income 50
Area A 25 20
Area B 10 5 x 3 D 10 25 50 75
100
Percentage of Households

35. The Gini Coefficient
The Gini Coefficient is the ratio of the area between the Lorenz curve and the perfect equality line (Area A in the previous slide) to the area under the perfect equality line (Areas A and B).

36. Effective Tax Rates for All Federal Taxes, 1998
Income Category (in quintiles)
Effective Tax Rate (percent)
Lowest
4.5
Second
13.3
Third
18.9
Fourth
22.1
Highest
28.7