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  • 1. TAX INCIDENCE, BURDEN, DWL of TAX
    May 13, 2011
  • 2. QUIZ
    1. A tax on sales of goods and services, domestically produced or imported, at each stage of the production and distribution process
    2. The EVAT Law of 2005 increased EVAT from 10% to ______.
  • 3. QUIZ
    3. Reformed structure of the Sin Taxes wherein a fixed amount is charged per unit of good sold.
    4. True economic weight of a tax
    5. Measures who actually pays the tax
    BONUS: Peso-dollar exchange rate (May 12)
  • 4. REVIEW
    Utilitarianism
    Social U = MU1 = MU2 = MU3 = MU4= MUN
    Rawlsian
    Social U = UPoorest
  • 5. VALUE-ADDED TAX (VAT)
    A tax on sale of goods and services, domestically produced or imported, at each stage of the production and distribution process
    Destination Principle
    Self-policing Feature
  • 6. EXPANDED VAT (2005)
    Why: addt’l revenue, cut budget deficits
    New VAT Rate
    Shift in nature of VAT
    VAT coverage
    Non-VAT provisions
  • 7. EXPANDED VAT (2005)
    Output-reducing effect from increasing VAT 1012%
    Additional burden on firms from input VAT credits for capital equipment distributed over
  • 8. SIN TAXES
    Levied on certain socially undesirable goods and services to discourage the public’s consumption. E.g. alcohol, tobacco
    Converted from ad valorem to specific taxes
  • 9. SIN TAXES
    Ad Valorem – percentage of
    Adjusts to inflation, keeps real value
    Misdeclaration of value of product
    Specific Taxes - Fixed amount per unit
    Prevents misdeclaration
    Fails to adjust to inflation
    Sol’n: indexation
  • 10. TAX ISSUES
    Tax performance - degree at which tax base has been exploited to mobilize gov’t resources
    Indices of Tax performance
    Tax ratio – taxes/GNP
    Tax effort index (taxable capacity)– actual/predicted ratios
  • 11. ACTIVITY
  • 12. TAX ISSUES
    Tax burden – true economic weight of a tax
    Diff bet real income before and after tax
    Tax incidence – whose real income is lowered
    Who actually pays
    Equivalent taxes – same effect
  • 13. TAX ISSUES
    Tax incidence in competitive markets
    No diff if tax is imposed on consumer or on producer
    Does not matter if ad valorem or specific
    Shifting down the demand curve
  • 14. TAX BURDEN
    Borne by consumers
    Tax decreases consumption
    Income effect: Less money
    Borne by producers
    Producer surplus = between SC and P
    Rev – TVC
  • 15. EFFECTS OF A TAX
    Consumer surplus – amount buyers are willing to pay for the good and amount they actually pay for it
    Area above the price line and below the demand curve
  • 16. No tax consumer surplus: A+B+C
    No tax producer surplus: D+E+F
  • 17. EFFECTS OF A TAX
    Producer Surplus – Amount sellers receive for a good minus their costs
    Area below the price line, above the supply curve
    Consumer+Producer surplus measures the welfare in society
  • 18. No tax consumer surplus: A+B+C
    No tax producer surplus: D+E+F
  • 19. EFFECTS OF A TAX
    After tax, total welfare is now divided into
    Consumer Surplus and Producer Surplus
    Gov’t Tax Revenue (TQ)
    Deadweight Loss – fall in total surplus that results from a market distortion such as a tax
  • 20. Supply
    Size of tax
    Price buyers
    pay
    Price
    without tax
    Price sellers
    receive
    Demand
    Quantity
    Quantity
    without tax
    with tax
    Buyers’ PriceSellers’ price
    Quantity
    0
  • 21. Supply
    A
    Price
    buyers
    PB
    =
    pay
    B
    C
    Price
    P1
    =
    without tax
    E
    D
    Price
    sellers
    PS
    =
    receive
    F
    Demand
    Q2
    Q1
    Price
    Quantity
    0
  • 22. EFFECTS OF A TAX
    Incentive for consumers to buy less
    Incentive for producers to produce less
    Both are worse off
    Market is below optimum
  • 23. EFFECTS OF A TAX
  • 24. EXAMPLE
    When you ride a tricycle and pay P25
    Tricycle driver – value for ride is P20
    Tricycle rider – value for ride is P30
    Both receive P5 benefit
    Total surplus – P10
    Both gain from the trade
  • 25. EXAMPLE
    Suppose gov’t levies a P20 tax on tricyle rides
    Most that riders are willing to pay is P30
    But then tricycle would be left with P10 after paying tax (P30-20=P10), less than his willingness which is P20
    For driver to receive P20, rider should pay P40 but willingness is only P30
  • 26. EXAMPLE
    Result: No trade happens
    Riders will prefer not to ride anymore
    Each loss surplus of P5
    Total deadweight loss is P10
    No tax revenue since trade was cancelled
  • 27. DETERMINANT OF DWL
    Price elasticities of supply and demand
    The greater the elasticities of demand and supply
    the larger the decline in equilibrium quantity and,
    the greater the deadweight loss of a tax
  • 28. Supply
    When supply is
    relatively inelastic,
    the deadweight loss
    of a tax is small.
    Size of tax
    Demand
    INELASTIC SUPPLY
    Price
    0
    Quantity
  • 29. When supply is relatively
    elastic, the deadweight
    loss of a tax is large.
    Supply
    Size
    of
    tax
    Demand
    ELASTIC SUPPLY
    Price
    Quantity
    0
  • 30. Supply
    Size of tax
    When demand is
    relatively inelastic,
    the deadweight loss
    of a tax is small.
    Demand
    INELASTIC DEMAND
    Price
    Quantity
    0
  • 31. Supply
    Size
    of
    tax
    Demand
    When demand is relatively
    elastic, the deadweight
    loss of a tax is large.
    ELASTIC DEMAND
    Price
    Quantity
    0
  • 32. DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY
    With each increase in the tax rate, the deadweight loss of the tax rises even more rapidly than the size of the tax.
  • 33. Deadweight
    loss
    Supply
    PB
    Tax revenue
    PS
    Demand
    Q1
    Q2
    SMALL TAX
    Price
    Quantity
    0
    Copyright © 2004 South-Western
  • 34. Deadweight
    loss
    PB
    Supply
    Tax
    revenue
    PS
    Demand
    Q2
    Q1
    MEDIUM TAX
    Price
    When the tax rate doubles, the deadweight loss quadruples
    Quantity
    0
  • 35. PB
    Deadweight
    loss
    Supply
    Tax revenue
    Demand
    PS
    Q1
    Q2
    LARGE TAX
    Price
    Quantity
    0
  • 36. 36
    DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY
    Tax revenue = tax rate × quantity bought and sold
    TR = T × Q
    T↑ causes Q↓
    Therefore, the effect of T↑ on TR is ambiguous
    T↑ causes TR↑ when the tax rate (T) is low
    T↑ causes TR↓ when the tax rate (T) is high
    This gives us the Laffer Curve
  • 37. T1
    LAFFER CURVE
    Note that it makes no sense at all to make the tax size bigger than T1.
    Tax
    Revenue
    Tax Size
    0
  • 38. IMPROVING TAX COMPLIANCE
    Tax Evasion – illegal means to avoid paying taxes
    Underdeclaration of sales
    Overdeclaration of claims for input VAT
    Misdeclaration of income
    Tax Avoidance – legal means to avoid paying taxes
  • 39. RANDOM NUMBERS
    Will be called in groups of five
    Line up and sign up
    Remember your schedule
    Show up on the day itself
    MOVE FAST! :D
  • 40. RANDOM NUMBERS
    Kross, Kim Go, Gabe, Jer, Carlo
    Daryll, Berna, Patty, Duane, JL
    Sean, Enzo, Therese, Ramon, Sela
    DBC, Mari, Lizzie, Deanna, Rico
    Belli, Raissa, Andro, Papu, Leo
    Bianca, Carol, Jaime, Neo, Zablar
    Suar, Pam, Em, Josh, Nica