Economics Notes

Chapter 14: Taxation and Income Distribution

Functional distribution of income- The way income is distributed among people when they are classified according to the inputs they supply to the production process (landlords, laborers)

Average Tax rate- ratio of taxes paid to income

Tax shifting-difference between statutory incidence and economic incidence

Relative Prices- ratio of the prices of two different commodities

Chapter 15: Taxation and Efficiency

Theory of the second best- In the presence of existing distortions, policies that in isolation would increase efficiency can decrease it, and vice versa. (Increase Tax A more demand B if enough demand, then it can offset loss from tax of A)

Double Dividend hypothesis- the proceeds from a pigouvian tax can be used to lower income tax rates more efficiency in both markets (not true)

Excess burden is caused by tax-induced distortions in behavior. Lump sum taxes do not distort behavior, but our unattractive.

Excess burden may result even in observed behavior is unaffected because it is the compensated response to tax that det.

Chapter 16: Efficient and Equitable Taxation

Neutral taxation- taxing each good at the same rate; not efficient

Ramsey Rule-Tax rates should be set so that the tax-induced percentage reduction in quantity demanded of each commodity is the same (to minimize total excess burden)

- Also holds for substitutes and compliments

Remember that Excess Burden is a consequence of distortions in quantities not prices

Inverse Elasticity Rule- Tax rates should be inversely proportional to elasticities (for goods that are unrelated in consumption)

Vertical equity- distributing tax burdens fairly across people with different abilities to pay

Natural monopoly-decreasing average costs

Horizontal Equity- people in equal positions should be treated equally

Tax avoidance- altering behavior to reduce tax liability

Tax evasion- not paying taxes legally due

Chapter 17: The Personal Income Tax

Imputed