Who Pays the Tax?
-
0:00 - 0:06♪ [music] ♪
-
0:09 - 0:12- [Tyler] In the last lecture,
we showed that the legal incidence -
0:12 - 0:15of a tax does not determine
the economic incidence. -
0:15 - 0:16In this lecture,
we're going to talk -
0:16 - 0:21about how the economic incidence
of taxes actually is determined. -
0:21 - 0:23Who bears the burden of a tax?
-
0:28 - 0:32Here is the rule for the economic
incidence of a tax. -
0:32 - 0:34The more elastic side
of the market will pay -
0:34 - 0:38a smaller share of the tax,
a smaller burden. -
0:38 - 0:41Similarly, the less elastic side
of the market -
0:41 - 0:44or rather the more inelastic side
of the market will pay -
0:44 - 0:46a greater share of the tax.
-
0:46 - 0:50So more elastic
pays a smaller share, -
0:50 - 0:53less elastic pays a greater share.
-
0:53 - 0:55I'm going to show you this
in a couple of diagrams -
0:55 - 0:59and then give you the intuition
for why it's the case. -
0:59 - 1:01Let's suppose
we can't remember the rule. -
1:01 - 1:04Is it the more elastic side
which bears the smaller share -
1:04 - 1:06of the tax or the greater share
of the tax? -
1:06 - 1:09Say we can't quite remember.
Well, no problem. -
1:09 - 1:13Let's just draw the diagram
and read it off as it happens. -
1:13 - 1:15For instance, let's draw a diagram
-
1:15 - 1:17which has a pretty elastic
demand curve -
1:17 - 1:22and relatively speaking
a pretty inelastic supply curve. -
1:22 - 1:24Here's the price
when there's no tax. -
1:24 - 1:26Now let's look at what happens
when there is a tax -
1:26 - 1:28and we'll use our wedge method.
-
1:28 - 1:31Here's the tax and the height
of the wedge gives us -
1:31 - 1:33the amount of the tax.
-
1:33 - 1:34What do we do?
-
1:34 - 1:36We drive this wedge
into the diagram -
1:36 - 1:38until the top of it
hits the demand curve -
1:38 - 1:41and the bottom of it
hits the supply curve -
1:41 - 1:44and then we just read
the answer off our diagram. -
1:44 - 1:47Point B, this tells us the price
paid by the buyer. -
1:47 - 1:52Point D, this tells us the price
received by the seller. -
1:52 - 1:53Let's compare.
-
1:53 - 1:56When there was no tax,
the price paid by the buyer -
1:56 - 1:59was at A, and with the tax
the price to the buyer -
1:59 - 2:01goes up a little bit to point B.
-
2:01 - 2:04The buyer isn't paying much
of a higher price. -
2:04 - 2:07On the other hand the seller
is receiving a lot less. -
2:07 - 2:11In this case, when demand
is more elastic than supply, -
2:11 - 2:14the demanders pay
a smaller share of the tax -
2:14 - 2:16and the suppliers
pay a larger share. -
2:16 - 2:19Therefore we can just read
off the diagram what happens -
2:19 - 2:22when demand
is more elastic than supply. -
2:23 - 2:24You don't have
to remember the rule, -
2:24 - 2:27you don't have to memorize it
because I'm going to give you -
2:27 - 2:29some intuition to make it easy
in just a moment. -
2:29 - 2:33You simply have to draw the diagram
and be able to read -
2:33 - 2:35the answer off the curves.
-
2:35 - 2:36Let's look at another case.
-
2:36 - 2:38In this case, we've drawn
a supply curve -
2:38 - 2:41which is very inelastic
and a demand curve -
2:41 - 2:44which is less elastic
than the supply curve. -
2:44 - 2:46Once again we're going
to take our tax wedge, -
2:46 - 2:50we're going to push it
into the diagram and what happens? -
2:50 - 2:51You can see it right here.
-
2:51 - 2:53We just have to read it
off the diagram. -
2:53 - 2:56Now we see that compared
to when there was no tax, -
2:56 - 2:59the price to the buyer
has gone up a lot -
2:59 - 3:01and the price to the sellers
has gone down -
3:01 - 3:03by just a little bit.
-
3:03 - 3:06When the supply
is more elastic than demand, -
3:06 - 3:08buyers pay the greater share
of the tax, -
3:08 - 3:11that is the price to the buyer
goes up more -
3:11 - 3:13than the price
to the sellers goes down. -
3:13 - 3:16The buyers pay more of the tax
when the supply curve -
3:16 - 3:17is more elastic.
-
3:17 - 3:19Let's give some intuition.
-
3:19 - 3:22You can always get the right answer
by drawing the curves. -
3:22 - 3:25And let's consider the intuition
for why that's the case. -
3:25 - 3:28So here's the intuition
for remembering the rule. -
3:28 - 3:31Think about elasticity
as a kind of escape. -
3:31 - 3:34The side of the market
which is the more elastic -
3:34 - 3:36can escape the tax more easily.
-
3:36 - 3:40Why does that makes sense?
Remember what elastic demand means. -
3:40 - 3:43It means that demanders
have good substitutes -
3:43 - 3:46for the taxed good
and so they can escape the tax. -
3:46 - 3:49When the tax is high,
the demanders are going to say, -
3:49 - 3:51"We're just going to go buy
the substitutes. -
3:51 - 3:53We have plenty
of good substitutes." -
3:53 - 3:55On the other hand,
think about what it means -
3:55 - 3:57when the demand is inelastic.
-
3:57 - 4:00It means that there
are no good substitutes -
4:00 - 4:02so it's hard to escape the tax.
-
4:02 - 4:05What about the supply side,
elastic supply? -
4:05 - 4:08Well, that means the resources
which are used to produce -
4:08 - 4:10the taxed good,
they can easily be moved -
4:10 - 4:12to other industries.
-
4:12 - 4:14The resources
can move around easily. -
4:14 - 4:18If you try to tax the industry
a lot then the land, the capital, -
4:18 - 4:20the workers in that industry
which were used -
4:20 - 4:22to produce the good,
they're just going to flow -
4:22 - 4:24to other industries
and so the suppliers -
4:24 - 4:27can relatively easily
escape the tax. -
4:28 - 4:30On the other hand,
if supply is inelastic -
4:30 - 4:33that means the resources used
to produce this good, -
4:33 - 4:37they really can only be used
to produce this good. -
4:37 - 4:39They're fixed, they're hard
to move around, -
4:39 - 4:41and those factors
are not that useful -
4:41 - 4:43for producing other goods,
so that makes it difficult -
4:43 - 4:47for the suppliers
when the supply curve is inelastic. -
4:47 - 4:49That means it's difficult
for the suppliers -
4:49 - 4:51to escape the tax.
-
4:51 - 4:53What if the demanders
and the suppliers -
4:53 - 4:55are both pretty elastic?
-
4:55 - 4:56Well, here's the thing.
-
4:56 - 5:00Somebody has to pay the tax,
both sides can't escape the tax -
5:00 - 5:03at least if the good is going
to be bought and sold, -
5:03 - 5:07therefore the burden is determined
by the relative elasticities. -
5:07 - 5:11It's about which side has it easier
to escape the tax -
5:11 - 5:14and that side will pay
less of the tax. -
5:14 - 5:17The side which is less elastic,
they're going to pay -
5:17 - 5:20more of the tax
because that side finds it harder -
5:20 - 5:22to escape the tax.
-
5:22 - 5:26So let's do an application,
say social security taxes. -
5:26 - 5:29Last time we showed
that the legal incidence -
5:29 - 5:31of social security taxes
has no bearing -
5:31 - 5:34on the economic incidence,
but we didn't say -
5:34 - 5:36what the economic incidence
actually is. -
5:36 - 5:38So let's do that now.
-
5:38 - 5:41We're going to have the price
of labor up here, the wage, -
5:41 - 5:44and the quantity
of labor down here. -
5:44 - 5:46The whole question
now boils down to -
5:46 - 5:48is the demand for labor,
more elastic -
5:48 - 5:51than the supply of labor
or vice versa? -
5:51 - 5:54Think about the demanders
of labor, businesses, -
5:54 - 5:56what substitutes
for labor do they have? -
5:56 - 6:00If the price of labor goes up,
what can those businesses do? -
6:00 - 6:03What about the supply
of labor, the workers? -
6:03 - 6:06If their wage goes down,
what can they do? -
6:06 - 6:08If you think about it,
I think you'll see -
6:08 - 6:11that for most workers,
especially full time workers, -
6:11 - 6:14they don't really have a lot
of good substitutes for work. -
6:14 - 6:16Most workers need some kind of job.
-
6:16 - 6:20Even if their wage goes down,
they're going to continue to work -
6:20 - 6:22because they need to pay the bills.
-
6:22 - 6:25On the other hand,
the demanders of labor -
6:25 - 6:27if the wage were to go up,
-
6:27 - 6:29they could substitute
capital for labor, -
6:29 - 6:32they could move their investments
to other countries. -
6:32 - 6:34They have quite a few
good substitutes. -
6:34 - 6:36So if that's actually how it works,
-
6:36 - 6:38we should probably draw
the diagram like this -
6:38 - 6:41with a fairly inelastic
supply of labor -
6:41 - 6:44and a fairly elastic
demand for labor. -
6:44 - 6:47Economists have done studies
of this and on average -
6:47 - 6:49this is what they find.
-
6:49 - 6:53So now think about your FICA taxes,
that's a tax on labor. -
6:53 - 6:54What's the effect of that?
-
6:54 - 6:56Well, it's going to look
something like this. -
6:56 - 6:59Notice that the wage
paid by buyers of labor, -
6:59 - 7:01that's the wage paid
by the firms -- -
7:01 - 7:03that goes up only a little bit.
-
7:03 - 7:05On the other hand,
the wage received -
7:05 - 7:08by the suppliers of labor,
that is the wage -
7:08 - 7:11which the workers end up with,
that goes down by a lot. -
7:11 - 7:15And this makes perfect sense
when we have a very inelastic -
7:15 - 7:16supply of labor.
-
7:16 - 7:19The laborers can't escape
the tax and, therefore, -
7:19 - 7:22they end up bearing
most of the burden of the tax. -
7:22 - 7:25This doesn't mean, by the way,
that we shouldn't have -
7:25 - 7:26social security taxes.
-
7:26 - 7:29It may in fact be a good way
of forcing people to save -
7:29 - 7:31for their own future,
but this does mean -
7:31 - 7:34it is not a free lunch
for the workers. -
7:34 - 7:37The workers' wages will drop
because of the tax. -
7:37 - 7:40If we didn't have
the social security tax, -
7:40 - 7:43wages for most workers
would in fact be higher. -
7:43 - 7:46Here's one more application,
health insurance mandates. -
7:46 - 7:49Suppose that the government
requires employers -
7:49 - 7:52to provide health insurance
to their workers -
7:52 - 7:54as is now the case
for many employers -
7:54 - 7:56under the Affordable Care Act.
-
7:56 - 7:57Who's going to pay for this?
-
7:57 - 7:59Who will end up paying for this?
-
7:59 - 8:03Is it primarily the employers
or primarily the workers? -
8:03 - 8:06It's really just the same analysis
as we had before. -
8:06 - 8:10A health insurance mandate
is quite similar to a tax. -
8:10 - 8:13A health insurance mandate
simply means that the employers -
8:13 - 8:17have to pay a higher wage,
but that's just, then, -
8:17 - 8:18the same as a tax.
-
8:18 - 8:21What we just saw
is that if labor supply -
8:21 - 8:25is less elastic than labor demand,
which in many cases makes sense, -
8:25 - 8:27then in that case most
of the mandate -
8:27 - 8:30will actually be paid for
by the workers. -
8:30 - 8:32Real wages will fall.
-
8:32 - 8:36Again this doesn't necessarily mean
that the mandate is a bad idea -
8:36 - 8:38but it does mean
it's not a free lunch -
8:38 - 8:39for the workers.
-
8:39 - 8:41The workers end up paying
for their health care -
8:41 - 8:44through the medium of lower wages.
-
8:44 - 8:46Taxes have a couple
of other effects -
8:46 - 8:49including the raising of revenue
and also creating -
8:49 - 8:50some dead weight loss.
-
8:50 - 8:53Those are what we're going
to look at in the next lecture. -
8:54 - 8:56- [Narrator] If you want
to test yourself, -
8:56 - 8:59click Practice questions.
-
8:59 - 9:02Or if you're ready to move on,
just click Next Video. -
9:02 - 9:06♪ [music] ♪
- Title:
- Who Pays the Tax?
- Description:
-
Who bears the burden of a tax? Buyers or sellers? Why is it that the more elastic side of the market will pay a smaller share of a tax. Again, we’ll apply what we know to the example of Social Security taxes and also look at the health insurance mandate as a part of the Affordable Care Act. Who pays for the mandate? The employers or the workers? We’ll also look at supply and demand of labor. Is the demand for labor more elastic than the supply?
Microeconomics Course: http://mruniversity.com/courses/principles-economics-microeconomicsAsk a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/tax-burden-elasticity-affordable-care-act-health-insurance-mandate#QandA
Next video: http://mruniversity.com/courses/principles-economics-microeconomics/deadweight-loss-definition-yacht-tax
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 09:07
Martel Espiritu edited English subtitles for Who Pays the Tax? | ||
Martel Espiritu edited English subtitles for Who Pays the Tax? | ||
Martel Espiritu edited English subtitles for Who Pays the Tax? | ||
MRU2 edited English subtitles for Who Pays the Tax? | ||
MRU2 edited English subtitles for Who Pays the Tax? |