Tax This, Tax That, Buyer Foot the Bill

Recall: New equilib emerges, price increases
-->why didn't go up to $4?
-Reduction in quantity
-Tax puts wedge btwn buyer value & seller cost
-Tax itself is just a transfer
Problem: distortionary, prevents other gain in society

Liability on sellers, but buyers pay 75 cents more

Current tax code is a mess, 51 pages to complete entire thing
Problem: people spend time & effort; Rizzo est. that he spend 15+ doing his taxes...ew
HUGE # of people to help with/process taxes (more than UPS, FedEx, Walmart & IBS combined!!)

Costs: could tax everyone, how spend tax revenue?
-build pointless bridges? bail out failed businesses?

Reasonable tax: divides $ appropriately
Problem: Fed uses taxes as excuse to spend more

New Sales Tax, Target the buyers!
Key Question:     What side of the market is affected?

	Buyers	Sellers
Initial P	$3.00	$3.00
Final P	$2.75	$2.75
Tax Paid	$1.00	----
Burden (Real Cost)	$0.75	$0.25

New Equilib: Qt= 275 mill
P buyers=$3.75  P sellers=$2.75
-Regardless who we ask to send a check same across! Whether sellers or buyers, the numbers are the same
-Policy makers have no control over "who eats it"
-Underlying economics forces buyers to pay most of the tax, even when target the sellers  (like last class)

ex: Payroll Tax
split 50/50, "share the burden" between the firm and the worker
-labor demand elasticity incredibly high
-higher worker costs, fire some of the work force
-worker always pays for the taxes in the end; lower tax, continue working; raise tax, lose job

Rizzo paid $37,800 in taxes...well I think I may stay in college for the next 20 years and avoid that nonsense

What determines who pays?

Buyers pay 75 cents, Sellers pay 25 cents

-Notice supply curve relatively flat  -->buyers pay big burden

Imagine: Flat Demand, sharp supply, ==>burden on the firms

Good Tax Policy: Not distortionary!
Supply/demand not elastic
-Efficient when tax property, cannot reduce demand when already live on plot of land
ex: Supply curve of oil inelastic
Consider: when make the firms pay, shareholders and customers really end up paying

Subsidy
-Any increase in demand/supply not soley...something
-Function of relative elasticity

ex: subsidize per gallon of ethanol produced
-prevent ..i was falling asleep
-force certain proportion

Consider graph in class:

At $300, S & D crossed at 1013; 

With subsidy, (new equilib)  cost $290 and supply 1113; at that quantity could have priced at $343

   ==>  43 / 53 = 80% customers...205?

What true in tax world same as subsidy! But here both buyer and seller better off