Tax incidence, Partial equillibrim an
d general equilibrium models
Dziva Anesu (R2117230W)
Zivanayi V.Nicol(R215138Y)
14-1
Vocabulary
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Statutory Incidence
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Economic Incidence
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Tax Shifting
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Partial Equilibrium Models
14-2
Tax Incidence: General Remarks
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Only people can bear taxes
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Functional distribution of income
Size distribution of income
Both sources and uses of income should be considered
Incidence depends on how prices are determined
Incidence depends on the disposition of tax revenues
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Balanced-budget tax incidence
Differential tax incidence
Lump-sum tax
Absolute tax incidence
14-3
Tax Progressiveness Can Be Measured in Several Ways

Average tax rate versus marginal tax rate
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Proportional tax system: A tax system under whi
ch an individual’s average tax rate is the same
at each level of income.

Progressive tax system: A tax system under whic
h an individual’s average tax rate increases with
income.
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Regressive tax system: A tax system under whic
h an individual’s average tax rate decreases with
income.
14-4
Measuring How Progressive a Tax System is
v1 
T
1
I1

T0
I0
I1 I0
v2 
T1  T0
T0
I1  I 0
I0
14-5
Tax on the demand side
14-6
Tax on the supply side
14-7
Perfectly inelastic supply
14-8
Perfectly elastic supply
14-9
Price per Pound of food
Ad Valorem Taxes
Sf
Pr
P0
Pm
Df
Df’
Qr
Q0
Qm
Pounds of food
per year
14-10
Taxes on Factors

The Payroll Tax
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Capital Taxation in a Global Economy
14-11
Wage rate per hour
The Payroll Tax
SL
Pr
wg = w0
wn
DL
DL’
L0 = L1
Hours per year
14-12
Commodity Taxation without Competition
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Monopoly

Oligopoly
14-13
Profits Taxes

Economic profit
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Perfect competition
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Monopoly
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Measuring economic profit
14-14
Monopoly
14-15
Tax Incidence and Capitalization
PR = $R0 + $R1/(1 + r) + $R2/(1 + r)2 + … + $RT/
(1 + r)T
PR’ = $(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)T
Capitalization
14-16
General Equilibrium Models

Partial equilibrium: Only consider the market
where tax is levied,does not consider spillover
effects.

General equilibrium: Considers the impact of
tax in other markets where tax was not levied.
This is used when the sector is large relative t
o the economy
14-17
Tax Equivalence Relations
tKF = a tax on capital used in the production of food
tKM = a tax on capital used in the production of manufactures
tLF = a tax on labor used in the production of food
tLM = a tax on labor used in the production of manufactures
tF = a tax on the consumption of food
tM = a tax on consumption of manufactures
tK = a tax on capital in both sectors
tL = a tax on labor in both sectors
t
= a general income tax
14-18
Tax Equivalence Relations

Partial factor taxes
tKF
and
and
tKM
tLF
are equivalent to
and
and
tLM
tF
and
are equivalent to
tM
are
are
are
equivalent
equivalent
equivalent
to
to
to
tK
and
tL
are equivalent to
t
Source: McLure [1971].
14-19
The Harberger Model
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Assumptions
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Technology
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Elasticity of substitution
Capital intensive
Labor intensive
Behavior of factor suppliers
Market structure
Total factor supplies
Consumer preferences
Tax incidence framework
14-20
Analysis of Various Taxes
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Commodity tax (tF)
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Income tax (t)
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General tax on labor (tL)
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Partial factor tax (tKM)
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Output effect
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Factor substitution effect
14-21
Some Qualifications
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Differences in individuals’ tastes
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Immobile factors
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Variable factor supplies
14-22