Ec102 may 13

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Ec102 may 13

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

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