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The tax incidence is thus said to fall on the employee. [3] However, it could equally well be argued that in some cases the incidence of the tax falls on the employer. This is because both the price elasticity of demand and price elasticity of supply effect upon whom the incidence of the tax falls.
The economic incidence of a tax falls on the party that bears the actual cost of the tax. Put another way, economic incidence reflects the actual change in an individual's or firm's resources due to the tax. [2] The statutory incidence of the tax is irrelevant to the economic incidence of the tax. [2] In fact, the economic incidence is ...
A common position in economics is that the costs in a cost-benefit analysis for any tax-funded project should be increased according to the marginal cost of funds, because that is close to the deadweight loss that will be experienced if the project is added to the budget, or to the deadweight loss removed if the project is removed from the budget.
In the pre-tax equilibrium the distance equals $5.00 x 0.20 = $1.00. This burden of the tax is again shared by the buyer and seller. If the new equilibrium quantity decreases to 85 and the buyer bears a higher proportion of the tax burden (e.g. $0.75), the total amount of tax collected equals $1.00 x 85 = $85.00.
In their economics textbook Principles of Economics (7th edition), economists Karl E. Case of Wellesley College and Ray Fair of Yale University state "The Laffer curve shows the relationship between tax rates and tax revenues. Supply-side economists use it to argue that it is possible to generate higher revenues by cutting tax rates, but ...
The flypaper theory of tax incidence is a pejorative term used by economists to describe the assumption that the burden of a tax, like a fly on flypaper, sticks wherever it first lands. Economists point out several flaws with the assumption: [citation needed] it ignores the elasticity of goods; and
Relatedly, the social MCF is the basis for the conditions of an optimal tax system and optimal spending on public services. Thus, the outcome of a tax reform can be calculated using pre- and post-reform MCFs as well as price indices. Practically, MCFs can be calculated based on the tax rate and the elasticities of demand and supply.
[7] [8] The result is based upon the intuition that the growth of the tax wedge between current and future consumption is related to the growth of the time horizon. So as to avoid unlimited growth in tax compounding as the horizon extends, the optimal average capital tax rate approximates zero.