11.1. meaning ? if you have a lunch in a restaurant and your bill includes with some tax, does it...
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11.1. Meaning ?
If you have a lunch in a restaurant and your bill includes with some tax, does it mean that the charged tax is paid all by yourself?
Answer: It may not. You may share the paid tax with the restaurant’s owner
Tax incidence Who does really pay the tax charged on goods,
such as a lunch that you eat in the restaurant ? Consumer, or producer or both
11.2. Tax Incidence in Competitive Markets
Effect of Tax at Firm Level
Po
Price S1S1
So
Tax rate t
q1 qo
Tax Makes a firm reducing its production from qo to q1
Quantity
Effect of Tax at Market Level
Po
Price S1S1
SoTax rate t
Q1 Qo
TaxMakes price increasing from Po to P1, and transaction decline from Qo to Q1
Po + t
P1
Quantity
Tax Incidence: Who Pay for Tax
Po
Price S1S1
SoTax rate t
Q1 Qo
Tax causes price increases from Po to P1, and transaction declines from Qo to Q1 Consumer’ tax contribution P1-P2 Producer’s tax (P1-P2)
P2
P1
Quantity
Po
Price
D1
DoSo
Pajak t
Q1 Qo
Tax levied on consumerMakes demand shifting from Do ke D1, and transaction declines from Qo to Q1 Consumer pays old price P2 and tax rate t Price becomes P1 Consumer’s share on tax = P1 – Po Producer’s share (Po-P2)
P2
P1
No Matters Whether Tax is Levied on Consumers or Producer
Quantity
11.3. Ad valorem Tax versus SpecificTax
Ad valorem tax Tax whose rate is percentage of price
For instance, t = 20 % of PSpecific tax
Tax whose rate is a fixed amount per unit of
product (t) For instance, t = Rp 500 / kg
Po
Price
D1
DoSo
Specific tax , Rp t per Kg
Q1 Qo
P1
Effect of Ad Valorem Tax versus Effect Specific Tax: Same on revenue and output
D3
Tax rate: c % dari harga
P2= Po + tax
Quantity
11.4. Effect of Elasticity on Tax Incidence
Po
Price
Do
So
Tax rate t
Q1 Qo
P1
If Demand is perfectly Inelastic, all tax is born By consumer
S1
Quantity
Po
Harga
Do
So
Pajak t
Q1 Qo
P1
If Supply is perfectly elastic, all tax is born by consumer
S1
Price
Do
Qo=Q1
Po=P1
If Supply perfectly Inelastic, all tax is born by producer
S Supply curve before and after tax
Quantity
Price
Do
Tax t
Q1 Qo
Po=P1
If demand is perfectly elastic, all tax is born Producer
S1
Quantity
S0
11.5. Tax Incidence on Wages
Levying tax on wages will reduce demand for labor by firm
Since, the tax will cause production cost increase
Analyzing Tax Incidence on Wages and Labor Demand
S
D1
Do
W1
Wo
Wages
Labor
Tax
L1 L0
Wo +tax
Tax born by laborer
Tax borne by firm
11.6. Readings Stiglitz, Joseph E. 2000. Economics of the
Public Sector. New York, USA: W.W. Northon and Company (Chapter 18)