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Taxation and Economic Efficiency

Key ideas:. Taxes affect behaviorAs persons seek to alter tax liabilityAttempts to alter tax liability are minimal under a lump sum" tax. Key ideas:. Deadweight loss from a taxRefers to how much worse people are under the given taxthan they would be under a lump sum tax that raised the same amo

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Taxation and Economic Efficiency

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    1. Taxation and Economic Efficiency Economics of Public Policy PADM 625 Ben Muse

    2. Key ideas: Taxes affect behavior As persons seek to alter tax liability Attempts to alter tax liability are minimal under a “lump sum” tax

    3. Key ideas: Deadweight loss from a tax Refers to how much worse people are under the given tax than they would be under a lump sum tax that raised the same amount of revenue

    4. Key ideas: Deadweight loss increases with teh size of the substitution effect (or the elasticity of demand) and increases with the square of the tax rate

    5. Lump sum taxes and deadweight losses

    6. Deadweight losses increase with substitutability and square of tax rate

    7. Deadweight loss increases disproportionately to the tax

    8. Bigger welfare losses with more elastic demand curve

    9. After some algebra - Deadweight loss increases with the elasticity of demand and with the square of the tax rate!

    10. An example: Airline ticket tax 10% tax estimated 0.5 price elasticity of demand Deadweight loss equal to 2.5% of the revenue raised

    11. Question 2 What is the deadweight loss from the mineral tax in problem 1, Chapter 18? What is the relationship between deadweight loss and supply curves? Relate this to the discussion of lump-sum taxes.

    12. Question 3 Taxes and government expenditure programs affect a variety of other aspects of household behavior. Some economists, for instance, argue that they affect birth rates. What provisions of the U.S> tax system might affect the decision to have a child? What government expenditure programs?

    13. Sources: Stiglitz, Chapter 19, “Taxation and Economic Efficiency”

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