CHAPTER 14Taxation and Income DistributionCopyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin14-2VocabularyStatutory Incidence Economic IncidenceTax ShiftingPartial Equilibrium Models 14-3Tax Incidence: General RemarksOnly people can bear taxesFunctional distribution of incomeSize distribution of incomeBoth sources and uses of income should be consideredIncidence depends on how prices are determinedIncidence depends on the disposition of tax revenuesBalanced-Budget tax incidenceDifferential tax incidenceLump-sum taxAbsolute tax incidence14-4Tax Progressiveness Can Be Measured in Several WaysAverage tax rate versus marginal tax rateProportional tax systemProgressive tax systemRegressive tax systemTax Liabilities under a hypothetical tax systemIncomeTax LiabilityAverage Tax RateMarginal Tax Rate$2,000-$200-0.100.2 3,000000.25,0004000.080.210,0001,4000.140.230,0005,4000.180.214-5Measuring How Progressive a Tax System Is14-6Measuring How Progressive a Tax System is A Numerical Example14-7Before TaxAfter TaxConsumers PaySuppliers Receive$1.40$1.00$1.20$1.20D0S0D1S1Partial Equilibrium ModelsQuantity$14-714-8DXSSXDXPerfectlyInelasticSupplyQuantity$14-814-9DXSSXDXPerfectlyElasticSupplyQuantity$14-914-10Ad Valorem TaxesPounds of food per yearPrice per Pound of foodDfSfQ0QmQrP0PmPrDf14-11Taxes on FactorsThe Payroll TaxCapital Taxation in a Global Economy14-12The Payroll TaxHours per yearWage rate per hourDLSLL0 = L1wg = w0PrDLwn14-13Commodity Taxation without CompetitionMonopolyOligopoly14-14MonopolyX per year$DXMRXATCXMXXX0P0ATC0abcdEconomicProfitsDXMRXPnigfhX1EconomicProfitsafter unittax14-15Profits TaxesEconomic profitPerfect competitionMonopolyMeasuring economic profit14-16Tax Incidence and CapitalizationPR = $R0 + $R1/(1 + r) + $R2/(1 + r)2 + + $RT/(1 + r)TPR = $(R0 u0) + $(R1 u1)/(1 + r) + $(R2 u2)/(1 + r)2 + + $(RT uT)/(1 + r)u0 + u1/(1 + r) + u2/(1 + r)2 + + uT/(1 + r)TCapitalization14-17General Equilibrium ModelsPartial equilibrium General equilibrium14-18Tax Equivalence RelationstKF = a tax on capital used in the production of foodtKM = a tax on capital used in the production of manufacturestLF = a tax on labor used in the production of foodtLM = a tax on labor used in the production of manufacturestF = a tax on the consumption of foodtM = a tax on consumption of manufacturestK = a tax on capital in both sectorstL = a tax on labor in both sectorst = a general income tax14-19Tax Equivalence RelationsPartial factor taxestKFandtLFare equivalent totFandandandtKMandtLMare equivalent totMareareareequivalentequivalentequivalenttotototKandtLare equivalent totSource: McLure 1971.14-20The Harberger ModelAssumptionsTechnologyElasticity of substitutionCapital intensiveLabor intensiveBehavior of factor suppliersMarket structureTotal factor suppliesConsumer preferencesTax incidence framework14-21Analysis of Various TaxesCommodity tax (tF)Income tax (t)General tax on labor (tL)Partial factor tax (tKM)Output effectFactor substitution effect14-22Some QualificationsDifferences in individuals tastesImmobile factorsVariable factor supplies14-23An Applied Incidence Study