• Toronto Metropolitan University

• ECN 101

Ch.7 - Taxes
 An excise tax is a per-unit tax on sales of a good or service (create a wedge).
 Tax incidence is a measure of who really bears the tax burden. (depends on elastcity)
 Doubling the tax rate will not double the revenue collected, as it will reduce the quantty transacted
 Tax Revenue = Area = excise tax*quantty
 The Laffer curve – cutng taxes doesn’t reduce government’s revenue (Reagan)
 A tax reduces both the consumer surplus and the producer surplus
 The deadweight loss caused by the tax represents the total surplus lost to society because of the tax
 Administratve costs of a tax are the resources used by the government to collect the tax
 The total inefciency caused by a tax is the sum of its deadweight loss and its administratve costs
 To minimize the efciency costs of taxaton, one should choose to tax inelastc goods (demand or supply)
 Tax fairness:
o Benefts principle – those who beneft from public spending should bear the burden of the
tax that pays for that spending (gas tax fund used to improve infrastructure)
o Ability to pay principle – those with greater ability to pay a tax should pay more tax
 A lump-sum tax (poll tax) or efcient but unfair tax, is the same for everyone (fxed taxaton)
 The fairest taxes distort incentves and perform badly on efciency
 There is a trade-off between equity and efciency (improving one makes the other worse off)
 Taxes:
o Base: the value of assets on which tax can be imposed
o Structure: specifes how the tax rates depend on the tax base
 Income tax: a tax on income
 Payroll tax: a tax on the earnings an employer pays to an employee
 Sales tax: a tax on the value of goods sold
 Profts tax (corporate income tax): a tax that depends on a frm’s proft
 Property tax: a tax that depends on the value of property
 Proportonal tax (flat tax) – tax rate is fxed
 Progressive tax – tax increases with income
 Regressive tax – tax decreases with income
 Marginal tax rate – the percentage of an increase in income that is taxed away
Ch. 10 – the ratonal consumer
 Utlity of a consumer – a measure of the satsfacton
 Consumpton bundle – the collecton of all the goods and services consumed by the individual
 Utlity functon – gives the total utlity generate by the bundle
 Marginal utlity – the change in total utlity by generatng one additonal unit of that good
 Diminishing marginal utlity – each extra unit adds less to total utlity than the previous unit
 Indifference curves – all combinatons of two goods
o ICs never cross
o Further away from origin, higher utlity
o ICs slope downward
o IC have convex shape