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Ten Tax Facts (PLUS, a bonus fact at no extra charge!)

1. Taxes can be avoided by refusing to sell or buy the taxed goods.Thus, taxes reduce utility and are inefficient.
2. An excise (per unit) tax can be shown as a vertical gap between the demand curve and the supply curve.
3. Price paid by buyer rises while price received by seller falls, but neither price changes by the full amount of the tax. The price paid by the buyer rises to PB and the price received by the seller falls to PS in this diagram.

consumer surplus after taxes
excess burden (reduced trade) from consumers
tax from consumers
excess burden (reduced trade) from producers
tax revenue from producers
producer surplus after taxes

4. Quantity traded falls because quantity demanded and quantity supplied are both lower. The quantity of trade falls to QT in the diagram above.
5. The difference between the buyers’ price and the sellers’ price is the tax per unit.
6. Revenue to government is
(tax per unit) x QT,
or (PB-PS) x QT
This corresponds to the areas labelled in this diagram.

consumer surplus after taxes
excess burden (reduced trade) from consumers
tax from consumers
excess burden (reduced trade) from producers
tax revenue from producers
producer surplus after taxes


7. Part of the tax is paid by buyers out of consumer surplus, and part is paid by sellers out of producer surplus (see above).
8. Every tax on trade or activity has an excess burden (sometimes called the deadweight loss). This is the area of the purple and brown triangles in this diagram.

consumer surplus after taxes
excess burden (reduced trade) from consumers
tax from consumers
excess burden (reduced trade) from producers
tax revenue from producers
producer surplus after taxes


This area is
Notice that the excess burden is proportional to the amount of the tax and the amount by which the tax reduces the quantity traded.
9. The tax is borne mostly by the group (buyers or sellers) with the steeper curve (not necessarily the group who writes the checks). See Figure below.

10. Excess Burden of a tax is greater if demand or supply curves are flat. See Figure above.
11. Other things equal, the government's revenue is greatest when the government taxes a good which has a steep demand curve, steep supply curve, or both.

Copyright 2006 by Ray Bromley. For economics information, and other information about Ray Bromley, visit www.raybromley.com. Permission to copy for educational use is granted, provided this notice is retained. All other rights reserved.
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