statutory tax

7/21/2019 Statutory Tax

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In this experiment, three people are assigned to a single role. Find yourteammates and sit together.

Remember: You are competing against the other teams.


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The Players and the Goals

In this experiment, each team controls a frm thatsells to a group o consumers.

FIR! select "hat price to charge.#o"er price means consumers purchase moreunits.

$igher price means consumers purchase e"er

units.


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The Players and the Goals

&oal: ma'e the most proft possible.

(roft ) Re*enue + ost

-(rice per unit -/nitssold

-0ax per unit -/nits!old

-1 -/nits sold


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Example

You "ill see a demandschedule li'e the one to

the right.

0he chart sho"s thenumber o units you "illsell depending on "hat

price you decide tocharge.

For example, i youcharge 3.43, you "ill

sell 53 units.

You must choose "hatprice to charge or yourproduct so as tomaximi6e your proft.


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Example

!uppose you charge

13.33 per unit.

How many units willyou sell?

750

What is your revenue?

($10.00) (750) =$7,500

What is your cost?

($1.00) (750) = $750

What is your prot?

$7,500 ! $750 = $",750


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Example

!uppose you charge

23.33 per unit.


550


($#0.00) (550) =$11,000

What is your cost?

($1.00) (550) = $550

What is your prot?

$11,000 ! $550 =$10,50


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Example

!uppose you charge

%3.33 per unit.


%50


($%0.00) (%50) =$10,500

What is your cost?

($1.00) (%50) = $%50

What is your prot?

$11,000 ! $550 =$10,150


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Example

!uppose you charge13.33 per unit.

&rot = $",750

!uppose you charge23.33 per unit. &rot = $10,50

!uppose you charge%3.33 per unit.

&rot = $10,150

these three prices,

23.33 is the best priceto charge.


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Round 1

hoose theprice you "illcharge or

your product.

;*ery unityou sell costsyou 1 toproduce.

0here is notax.


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Round 1


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Statutory vs. Economic Tax Burden (or taxincidence)'tatutory ta ur*enis the amount o tax collected rom aperson.

+conomic ta ur*enis the amount o tax paid by a person.

;xample:


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;xample:


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;xample:


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;xample:

uired to pay the other 4,333.

In response to the tax, the employer cuts the "or'er=s salary by4,333.

Who ears the statutory an* economic ur*ens o the ta?

!tatutory burden is shared by the "or'er and employer, but


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Sales/Excise Tax


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Round ! Statutory Tax Burden is on"onsumers

In this round, consumers "ill pay an additional 4 per unit tax.

0he price consumers pay is the price you charge -the producer

price plus 4.

0he statutory tax burden is on the consumer.

d


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Round

In this round,consumers"ill pay an

additional 4per unit tax.

0he consumerprice is the

price youcharge plusthe 4 tax.

- you chare,$7, how many

units willconsumersuy?77

What is yourprot?

($7)(77) ! ($1)(77) = $5%#

R d


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Round


your product-the priceexcludingtax.

0he consumerprice is theprice youcharge plus4.

;*ery unityou sell costsyou 1 toproduce.

R d


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15

Round

R d


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23

Round

R d # St t t T B d i P d


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Round #! Statutory Tax Burden is on Producers

In this round, producers "ill pay a 4 per unit tax or e*eryunit they sell.

0he price consumers pay is the price you charge.

0he statutory tax burden is on the producer.

R d #


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Round #

In this round,producers "illpay a 4 per

unit tax.

Your cost perunit is no" 7-1 per unit

to produceplus 4 perunit tax.

- you chare,$7, how many

units willconsumersuy?101

What is yourprot?

($7)(101) ! ($")(77) = $#5

R d #


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2%

Round #


your product.

0he consumerprice is theprice youcharge.

;*ery unityou sell costs

you 7.

Ro nd #


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Round #

Round #


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Round #

Round #


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Round #

$uxury versus %ecessity


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onsumption o luurygoods is more sensiti*e to pricechanges.

onsumption o necessity goods is less sensiti*e to pricechanges.;xample:

At a price o 13 per tic'et, $o"ie "ill see 13 mo*ies per year.

I the price rises to 12, $o"ie "ill cut bac' to 4 mo*ies peryear.

23B rise in price results in a 43B reduction in consumption

$o"ie=s consumption is highly sensiti*e to price changes.

For $o"ie, mo*ies are a luxury good.



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onsumption o luurygoods is more sensiti*e to pricechanges.

onsumption o necessity goods is less sensiti*e to pricechanges.;xample:

At a price o 13 per tic'et, Rob "ill see 13 mo*ies per year.

I the price rises to 12, Rob "ill cut bac' to 5 mo*ies per year.

23B rise in price results in a 13B reduction in consumption

Rob=s consumption is less sensiti*e to price changes.For Rob, mo*ies are a necessity good.

Round &


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Round &


your product.

0he consumerprice is theprice youcharge.

;*ery unityou sell costs

you 7.

Round &


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%3

Round &

Round &


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%1

Round &


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'o to increase tax revenue


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%%


In an attempt to increase tax re*enue, the go*ernmentincreases the tax rom 4 per unit to 14 per unit.

Round


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%

Round


your product.

0he consumerprice is theprice you

charge.

;*ery unityou sell costsyou 17.

Round


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%4

Round

Round


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%7

Round

Round


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%8

Round

Round


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%9

Round



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%5


In an attempt to increase tax re*enue e*en urther, thego*ernment increases the tax rom 14 per unit to 24 perunit.

Round *


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Round *


your product.

0he consumerprice is theprice you

charge.

;*ery unityou sell costsyou 27.

Round *


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Round *

Round *


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Round *

Round *


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Round *

Round *


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Coes it "or' this "ay in the real"orldD


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8!ource: !ocial !ecurity Administration and the /.!. Eureau o #abor !tatistics.


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A*erage annual "age gro"th "hen !! tax increases ) 1.3B

A*erage annual "age gro"th "hen !! tax does not change )1.%B

!ource: !ocial !ecurity Administration and the /.!. Eureau o #abor !tatistics.


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A*erage annual "age gro"th "hen !! tax increases ) 1.3B

A*erage annual "age gro"th "hen !! tax does not change )1.%B

Increasing !! tax slo"s a*erage "age gro"th by3.%B.


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Coes increasing !ocial !ecurity taxincrease !ocial !ecurity taxre*enuesD


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!ource: /.!. Eureau o #abor !tatistics.


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!ource: /.!. Eureau o #abor !tatistics.


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4%

Coes increasing the capital gains taxrate increase tax re*enuesD


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!ource: &"artney, .C. and R.&. $olcombe, 1558. ptimal apital &ains 0ax (olicy. Report to the oint

;conomic ommittee o the /nited !tates ongress.


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!ource: &"artney, .C. and R.&. $olcombe, 1558. ptimal apital &ains 0ax (olicy. Report to the oint

;conomic ommittee o the /nited !tates ongress.


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0"o possible goals or tax policy:

1. Raise re*enue.

2. Redistribute income.


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an "e tax the rich by taxing thingsthat rich people buyD

1553 Cefcit Reduction #a": 0he ?#uxury 0ax@


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1553 Cefcit Reduction #a": 0he #uxury 0ax

&oal: Raise tax re*enue by raising taxes on ?the rich.@

eans:13B excise tax on recreational planes.

Result: 93 e"er planes sold1%3 million lost sales93 lost Gobs

;stimated tax re*enue: 7 million.

Actual tax re*enue: 4%3,333.

;conomic burden o the tax ell almost entirely on ?thepoor.@

&o*ernment gained 1,133 or e*ery Gob a "or'er lost.

Source: Joint Committee on Taxation, Methodology and Issues in the Revenue Estimating Proecess !JC"#$#%&',January $(, )%%&*


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an "e get more money rom the

rich by taxing their income at ahigher rateD


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In early 1523=s, the top income tax

rate "as decreased rom 8%B to2B.


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In early 1573=s, the top income tax

rate "as decreased rom 53B to83B.


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7%

0op Income 0ax Rate ut rom 53B to 83B in ;arly 1573=s


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0op Income 0ax Rate ut rom 43B to 29B in ;arly 1593=s


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0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

$100,

000

+

o,-ouseholds

1980

Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673.

20%Income Cistribution or 233% -in 233%


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0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

$1

00,

000

+

o,-ouseholds

1980 2003



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In 1593, the lo"er 93B ohouseholds earned 47B o all

income.

Ey 233%, the lo"er 93B ohouseholds earned only 43B o allincome.

In "hich "orld "ould each person rather


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c o d ou d eac pe so a eli*eD

-prices are the same in the t"o "orlds

In "orld H1, (erson 13 earns 11B o all income.

In "orld H2, (erson 13 earns 14B o all income.


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In


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pli*eD

-prices are the same in the t"o "orlds


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$60,000;xpected 0ax and Eenefts or edian


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($30,000)

($20,000)

($10,000)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$ ,

22

25

28

31

34

37

40

43

46

49

52

55

58

61

64

67

70

73

76

79

82

85

88

91

94

97

100

ompiled rom data published in 233% !tatistical Abstract o the /nited !tates, /.!. Eureau o the ensus, and pro*ided by the !ocial !ecurityAdministration

;xpected annual !ocial !ecurity taxpayments

;xpected annual !ocial !ecurity

benefts

$320,000;xpected annual benefts rom pri*ati6ed

account


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($30,000)

$20,000

$70,000

$120,000

$170,000

$220,000

$270,000

1 5 913

17

21

25

29

33

37

41

45

49

53

57

61

65

69

73

77

ompiled rom data published in 233% !tatistical Abstract o the /nited !tates, /.!. Eureau o the ensus, and pro*ided by the !ocial !ecurityAdministration

;xpected annual !ocial !ecurity taxpayments

account0his chart assumes that 133B o the"or'er=s current !ocial !ecurity taxesare di*erted to a pri*ate in*estmentaccount yielding an 9B annual return.

statutory tax

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