only two things are certain in life death and taxes we're so the saying goes everyone pays taxes and for most it is the primary way in which they interact with their government politicians debate endlessly over what exactly should be taxed and how much those taxes should be so let's dive into one of my favorite topics in economics taxes we will start by thinking about taxes on goods and services here are a few examples sales taxes are the most common taxes on goods and services in the United States sales taxes are a tax on retail sales of goods and services generally levied as a percentage of the purchase price at the time of this recording Arizona has a 5.6 percent sales tax meaning that you pay 5.6 percent of the price of things you buy in taxes when you buy it Maricopa County adds a 0.7 sales tax to that and the City of Phoenix has their own 2.3 percent sales tax So when you buy retail Goods in Phoenix you pay a total sales tax of 8.6 percent value-added taxes are not common in the U.S but they are common in Europe and other places around the world a value-added tax is a tax assessed and paid at each stage of production generally levied as a percentage of the value added a country might impose a 10 value added tax which means that every exchange not just retail exchanges pay 10 percent when they buy something for example a farmer might grow cotton and sell it to a textile maker who spins it into cloth and sells it to a clothes maker who makes a shirt and they sell it to a retail store who sells the shirt to you with a sales tax you pay the tax when you buy the shirt but the farmer textile maker clothing maker and Retail Store don't pay any tax with a value-added tax the tax is paid when the farmer sells to the textile maker and again when the textile maker sells to the clothing maker and again when the clothing maker sells to the retail store and again when the retail store sells it to you as you might imagine a value-added x has a much broader base and raises more revenue for the government then there are excise taxes which are taxes imposed on specific Goods or activities generally levied as a fixed amount but sometimes as a percentage of the price there's an excise tax on gasoline in Arizona which is used to pay for road work as of this recording the tax is 18 cents per gallon so it's a fixed amount and not a percentage of the price there's also an excise tax on cigarettes and on alcohol those are in addition to the normal sales taxes we can evaluate the effect of these taxes on goods and services using supply and demand here we have a typical Market with an upward sloping supply curve and downward sloping demand curve the equilibrium will be where supply and demand cross and this will set the market price and Market quantity for this good what would happen if we put a tax on the producers let's imagine it's an excise tax of say one dollar per unit so now firms which produce this product will have to pay one dollar for every unit they produce in taxes how will that impact the supply of this product this tax is just another cost for producers and higher costs Shift Supply to the left which is a decrease in Supply this would be our new Supply with the tax but how much does Supply shift a lot or a little Supply will decrease shifting left until the vertical distance between the old Supply and the new one is equal to the tax remember Supply represents the marginal cost of production and if we add a one dollar tax per unit that is increasing those marginal costs by one dollar for every unit so Supply moves up vertically by the amount of the tax this creates a new market equilibrium where demand crosses with the new supply curve will be the price set by the market we can see that this is higher than the market price when there was no tax but this is not the price producers will earn when they sell the product they're paid this higher price by the consumer but that they have to subtract the amount of the tax from that and they're left earning this lower price down here since that difference is the amount of the tax paid to the government and it will be paid for each unit produced and sold the total tax revenue collected by the government will be this rectangle which is just the tax times the quantity produced with the tax in place but of course there are some mutually beneficial transactions which do not happen now generating dead weight loss these are consumers willing to pay more than the marginal costs of production but not so much more that they can also pay the tax notice also that the price consumers are paying went up by less than the amount of the tax here it looks like consumers and producers are splitting the tax pretty evenly when everything is said and done instead of putting the tax on producers we could instead put it on consumers now instead of the producer paying a one dollar excise tax for each unit they produce consumers will have to pay a one dollar tax on each unit they buy what effect will this have on demand well whatever people were willing to pay for the product before now they're willing to pay one dollar less because they need to save that dollar for the tax that means demand decreases and shifts to the left but just like before the vertical movement in demand will be equal to the amount of the tax everyone is willing to pay exactly one dollar less than before and so demand Falls by exactly that amount that means the retail price of this product is going to fall now firms will charge consumers this price down here but the total amount consumers will be paying for the product will be this price up here which is the price plus the tax once again the tax revenue falls into this area here which is the tax times the quantity purchased and there's some deadweight loss where consumers are priced out by the addition of the tax whether they are placed on producers or on consumers taxes on goods and services have the same result the price with the tax increases which is what consumers will end up paying the government will take from that price the amount of the tax and the rest will go to the producers since the price consumers pay increases while the price producers earn decreases the quantity which will be produced and sold will decline when we add a tax which means there's some deadweight loss