Click on the button to go to the problem
© 2013 Pearson
Taxes
8
CHECKPOINTS
© 2013 Pearson
Click on the button to go to the problem
Checkpoint 8.1
Checkpoint 8.2
Checkpoint 8.3
Problem 1
Problem 1
Problem 1
Problem 2
Problem 2
In the News
Problem 3
Problem 3
In the News
In the News
© 2013 Pearson
Clicker
version
Clicker
version
CHECKPOINT 8.1
Practice Problem 1
The figure shows the market for
basketballs in which
basketballs are not taxed.
If buyers are now taxed $6 a
ball, what price does the buyer
pay and how many basketballs
are bought?
What is the tax revenue from
the sale of basketballs?
© 2013 Pearson
CHECKPOINT 8.1
Solution
With a $6 tax on buyers, the
demand curve shifts
downward by $6 a ball.
The price that the buyer pays
is $16 a basketball and 8
million basketballs a week
are bought.
The tax revenue is
$6 x 8 million, which is $48
million a week (the purple
rectangle).
© 2013 Pearson
CHECKPOINT 8.1
Practice Problem 2
The figure shows the market for
basketballs in which basketballs
are not taxed.
If sellers are now taxed $6 a ball,
what price does the seller receive
and how many basketballs are
sold?
What is the tax revenue from the
sale of basketballs?
© 2013 Pearson
CHECKPOINT 8.1
Solution
With a $6 tax on sellers, the
supply curve shifts upward by $6
a ball.
The price that the seller receives
is $10 a basketball and 8 million
basketballs a week are bought.
The tax revenue is
$6 x 8 million, which is $48
million a week (the purple
rectangle).
© 2013 Pearson
CHECKPOINT 8.1
Practice Problem 3
The figure shows the market for
basketballs in which basketballs
are not taxed.
Now basketballs are taxed $6 a
ball.
What is the excess burden of the
tax on basketballs?
Is the demand for, or the supply
of, basketballs more inelastic?
Explain your answer.
© 2013 Pearson
CHECKPOINT 8.1
Solution
The excess burden of the tax is
measured by the deadweight
loss it creates.
The deadweight loss is the area
of the gray triangle in the figure,
which is ½ of (4 million balls x
$6 a ball).
Excess burden is $12 million.
© 2013 Pearson
CHECKPOINT 8.1
The $6 tax increases the price
paid by buyers by $1 and
lowers the price received by
sellers by $5.
Because the seller pays the
larger share of the tax, the
supply of basketballs is more
inelastic than the demand for
basketballs.
© 2013 Pearson
CHECKPOINT 8.1
In the news
Biggest U.S. tax hike on tobacco takes effect
The federal government has raised the tax on cigarettes
from 39¢ to $1.01 a pack—an increase of 62¢. Before the
tax hike, cigarettes were $5 a pack. Analysts say that in the
past a price increase of 10 percent cut cigarette
consumption by 4 percent. With this new tax, at least 1
million of the 45 million smokers are expected to quit.
Source: USA Today, April 3, 2009
Is the demand for cigarettes elastic or inelastic? Will the
price rise to $5.62 a pack? Who pays most of the tax
increase—smokers or tobacco companies?
© 2013 Pearson
CHECKPOINT 8.1
Solution
If a 10 percent price increase decreases consumption by 4 percent, the
price elasticity of demand for cigarettes is 4/10, or 0.4.
The demand for cigarettes is inelastic.
With the demand for cigarettes inelastic, the 62¢ tax increase will not
increase the price to $5.62.
The price would rise to $5.62 only if the demand were perfectly
inelastic.
The tax will be shared between buyers and sellers.
Because demand is inelastic, buyers (smokers) will pay more of the 62¢
tax than the sellers (tobacco companies).
© 2013 Pearson
CHECKPOINT 8.2
Practice Problem 1
Florida levies the following taxes:
5.5 percent corporate income tax;
6 percent sales tax;
4 cent a gallon tax on gasoline, 33.9 cents for a pack of
cigarettes, $0.48 a gallon on beer, and $2.25 a gallon on
wine;
property taxes vary across the counties and range from 1.4
percent to 2.0 percent of property values.
Classify Florida’s taxes into progressive, proportional, and
regressive taxes.
© 2013 Pearson
CHECKPOINT 8.2
Solution
If counties with the higher rates are those with high property
values, then Florida’s property taxes are progressive.
The corporate income tax does not vary with income, so this
tax is a proportional tax.
Saving increases with income, so expenditure as a fraction
of income decreases as income increases. So the taxes on
sales, gasoline, cigarettes, beer, and wine are regressive
taxes.
© 2013 Pearson
CHECKPOINT 8.2
Practice Problem 2
Explain why Tiger Woods pays his own Social Security tax
and the PGA (the Professional Golf Association) pays
none of it.
© 2013 Pearson
CHECKPOINT 8.2
Solution
Tiger Woods pays his Social Security tax and the PGA
pays none of it because the supply of Tiger Woods’
services is (most likely) perfectly inelastic.
The elasticities of demand and supply determine who
pays the tax.
© 2013 Pearson
CHECKPOINT 8.2
Practice Problem 3
Which tax is more efficient: a tax on land rent or a tax on
capital income? Explain.
© 2013 Pearson
CHECKPOINT 8.2
Solution
A tax on capital income is more efficient than a tax on
land rent.
A tax on capital income has the larger effect on the
quantity of factors of production employed than does a
tax on land rent because the supply of land is perfectly
inelastic whereas the supply of capital is highly elastic.
The larger the decrease in the quantity, the larger the
deadweight loss created by the tax (the excess burden
of the tax) and the more inefficient is the tax.
© 2013 Pearson
CHECKPOINT 8.2
Study Plan Problem
A tax on the rent from a block of land _______ a
tax on capital income because the supply of land is
______ and the supply of capital is _______.
A. can be more efficient or less efficient than; elastic; more
elastic than the supply of capital
B. is more efficient than; inelastic; elastic
C. is less efficient than; elastic; inelastic
D. is more inefficient than; inelastic; elastic
E. is as efficient as; inelastic; inelastic
© 2013 Pearson
CHECKPOINT 8.2
Practice Problem 4
Illinois Governor proposes broad array of tax increases
Faced with a huge budget deficit, Illinois Governor Patrick
Quinn has proposed a 50 percent increase in the personal
income tax rate.
Source: The Wall Street Journal, March 20, 2009
Explain the effects of the tax hike on labor income.
Will workers or employers pay most of the tax increase?
© 2013 Pearson
CHECKPOINT 8.2
Solution
A tax on labor income will not change the demand for labor,
but it will decrease the quantity of labor employed.
The wage rate paid by employers will rise, the wage rate
received by workers will fall, and the deadweight loss will
increase.
Because the demand for labor is elastic and the supply of
labor is inelastic, most of the increase in the tax will be paid
by the worker.
© 2013 Pearson
CHECKPOINT 8.3
Practice Problem 1
In Hong Kong, the marginal income tax rates range from
2 percent to 20 percent.
Does Hong Kong place greater weight on the ability-to-pay
principle than does the United States?
Does Hong Kong place a greater weight on efficiency and a
smaller weight on fairness than does the United States?
© 2013 Pearson
CHECKPOINT 8.3
Solution
Income tax rates are lower in Hong Kong than in the United
States, so Hong Kong places less weight on the ability-topay principle than does the United States.
With income tax rates in Hong Kong lower than in the United
States, Hong Kong places a greater weight on efficiency and
a smaller weight on fairness than the United States does.
© 2013 Pearson
CHECKPOINT 8.3
Study Plan Problem
In Hong Kong, the marginal income tax rates range from
2 percent to 20 percent. Hong Kong places a______
weight on the ability-to-pay principle, a ______ weight on
efficiency and a _____ weight on fairness than does the
United States.
A. smaller; greater; smaller
B. smaller; smaller; greater
C. greater; smaller; greater
D. greater; greater; smaller
E. smaller; smaller; smaller
© 2013 Pearson
CHECKPOINT 8.3
In the News
Michael Nutter of Philadelphia is pushing the 2-cents-perounce tax on soda to help prevent cuts in the city’s cashstrapped school system.
Source: The Wall Street Journal, June 14, 2011
Which principle of fairness will the mayor use to justify a tax
on soda?
© 2013 Pearson
CHECKPOINT 8.3
Solution
Two principles of fairness are the benefits principle and the
ability-to-pay principle.
The mayor will justify the tax on the ability-to-pay principle
and use the tax revenue raised to help finance the city’s
school system.
© 2013 Pearson