Labor income tax[ edit ] Main article: Optimal labor income taxation The theory of optimal income tax on individual labor aims to find the optimal trade-off between the following three effects of increasing taxation: The mechanical effect - an increase in tax-rate increases the government revenue, if no individuals changed their behaviour in response.
Taxation of capital in any form: above all financial instruments, assets then property was proposed as most optimal by Thomas Piketty . Capital income tax[ edit ] Main article: Optimal capital income taxation The theory of optimal capital income tax considers the capital income as future consumption.
The third point is that commodity taxation raises revenue, but it also takes away some gains from trade, that is, it creates deadweight loss.
Incidence of commodity tax
Sales tax[ edit ] A third consideration for optimal taxation is sales tax, which is the additional price added to the base price of a paid by the consumer at the point when they purchase a good or service. People earning lower incomes would then pay more as a percentage of their income than higher-income earners. The maximum amount that apple was worth to you is a dollar. No, it doesn't mean that. Again, that equilibrium is at point A. The incidence of a taxthat is, the proportions of the tax revenue ultimately paid by consumers and producersis independent of whether it is consumers or producers that have to pay the tax to the government. Furthermore, this can potentially apply to a broader range of conditions. We can think about a tax on suppliers as increasing their costs.
The analysis above seems to suggest that commodity taxation is often bad because it reduces efficiency. First, who pays the tax does not depend on who writes the check to the government. That is, the legal incidence of the tax falls on the suppliers.
For example, suppose the government is taxing apples. Baumol and David F. In an attempt to reduce excess burden of consumption taxes, Ramsey proposed a theoretical solution that consumption tax on each good should be "proportional to the sum of the reciprocals of its supply and demand elasticities ". The difference is the amount of the tax. His study coincides with the original hypothesis that retail sales taxes are fully shifted to retail prices. The current system has two major drawbacks. Land value taxation[ edit ] One of the early propositions on taxing capital according to the broader neoclassical definition of "capital" was to capture the full rental value of land. Trade between the states is regulated by the Centre under an entirely separate set of rules. The solution is to, after individuals reach a certain income level, ensure that the marginal tax remains steady. Let's shift the demand curve down by the amount of the tax. Slemrod advocates this theory because not only does it take into account the preferences of individuals, but also the technology involved in tax collecting.
Let's do an application. What about the price received by the sellers?
Is sin tax a commodity tax
So, let's start with point one. In other words, what the tax does, it means that the buyers pay more than before, and the sellers receive less than before. We can show that, despite superficial appearances, it may make no difference whether a given tax is levied on the consumer or the producer. A practical application of this, for example, is implementing value-added taxes, a tax on the purchase price of a good or service, to correct tax evasion. The price the suppliers receive will be point D. In his article "Effects of Taxes on Economic Behavior," Martin Feldstein discusses how economic behavior determined by taxes is important for estimating revenue, calculating efficiency and understanding the negative externalities in the short run. Neighboring states will often have dramatically different tax systems. You're only willing to pay the maximum amount that you're going to be willing to pay suppliers is now 75 cents. Mankiw argues that Diamond's and Mirrlees's theory is extremely complex because of how difficult it is to keep track of individuals producing at their maximum levels. The tax is exactly the same amount that it was before. Trade between the states is regulated by the Centre under an entirely separate set of rules. For example, suppose the government is taxing apples.
December Learn how and when to remove this template message Arnold Harberger has conducted research on optimal taxation for corporations. Those individuals or corporations who have the most inelastic demand curve pay the brunt of the excess burden curve.
If the tax rate prior to the adoption of these provisions was optimal, there is an assumption that the net marginal benefit of increased taxation is zero in the locality of the optimum rate the marginal costs and benefits sum to zero.
So let's get going.
based on 67 review