Lecture on Taxes in Economics

Introduction

• "Death and taxes" are the two certainties in life.
• Taxes are the primary way individuals interact with their government.
• Politicians often debate the specifics of taxation.

Taxes on Goods and Services

Sales Taxes

• Common in the U.S.
• Applied as a percentage of the purchase price.
• Example: Phoenix, Arizona
  • State sales tax: 5.6%
  • Maricopa County: additional 0.7%
  • City of Phoenix: additional 2.3%
  • Total: 8.6% sales tax on retail goods.

Value-Added Taxes (VAT)

• Not common in the U.S., prevalent in Europe.
• Assessed and paid at each stage of production.
• Example:
  • Every transaction in production chain is taxed.
  • Broader base than sales tax and raises more revenue.

Excise Taxes

• Levied on specific goods or activities.
• Can be a fixed amount or percentage of price.
• Example: Arizona gasoline excise tax
  • 18 cents per gallon to fund road work.
  • Also applied to cigarettes and alcohol.

Impact of Taxes on Market Equilibrium

Supply and Demand Analysis

• Typical market has:
  • Upward-sloping supply curve.
  • Downward-sloping demand curve.
• Equilibrium is where these curves intersect, setting market price and quantity.

Excise Tax Impact on Producers

• Example: Excise tax of $1 per unit.
• Tax increases production costs, shifting supply curve left.
• New supply curve sets higher market price, but producers earn less after tax.
• Tax revenue = tax amount x quantity produced.
• Creates deadweight loss from foregone transactions.
• Consumers and producers usually share the tax burden.

Excise Tax Impact on Consumers

• Tax imposed on consumers decreases demand, shifting curve left.
• Retail price falls, but total consumer cost includes tax.
• Tax revenue = tax amount x quantity purchased.
• Similar deadweight loss occurs.

Conclusion

• Whether on producers or consumers, taxes raise prices and reduce quantities.
• Results in deadweight loss as some beneficial transactions are lost.
• Ultimately, taxes affect both consumer prices and producer earnings.