Who Pays the Tax?
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Not Synced♪ [music] ♪
-
Not Synced- [Tyler] In the last lecture,
we showed that the legal incidence -
Not Syncedof a tax does not determine
the economic incidence. -
Not SyncedIn this lecture,
we're going to talk -
Not Syncedabout how the economic incidence
of taxes actually is determined. -
Not SyncedWho bears the burden of a tax?
-
Not SyncedHere is the rule for the economic
incidence of a tax. -
Not SyncedThe more elastic side
of the market will pay -
Not Synceda smaller share of the tax,
a smaller burden. -
Not SyncedSimilarly, the less elastic side
of the market -
Not Syncedor rather the more inelastic side
of the market will pay -
Not Synceda greater share of the tax.
-
Not SyncedSo more elastic
pays a smaller share, -
Not Syncedless elastic pays a greater share.
-
Not SyncedI'm going to show you this
in a couple of diagrams -
Not Syncedand then give you the intuition
for why it's the case. -
Not SyncedLet's suppose
we can't remember the rule. -
Not SyncedIs it the more elastic side
which bears the smaller share -
Not Syncedof the tax or the greater share
of the tax? -
Not SyncedSay we can't quite remember.
Well, no problem. -
Not SyncedLet's just draw the diagram
and read it off as it happens. -
Not SyncedFor instance, let's draw a diagram
-
Not Syncedwhich has a pretty elastic
demand curve -
Not Syncedand relatively speaking
a pretty inelastic supply curve. -
Not SyncedHere's the price
when there's no tax. -
Not SyncedNow let's look at what happens
when there is a tax -
Not Syncedand we'll use our wedge method.
-
Not SyncedHere's the tax and the height
of the wedge gives us -
Not Syncedthe amount of the tax.
-
Not SyncedWhat do we do?
-
Not SyncedWe drive this wedge
into the diagram -
Not Synceduntil the top of it
hits the demand curve -
Not Syncedand the bottom of it
hits the supply curve -
Not Syncedand then we just read
the answer off our diagram. -
Not SyncedPoint B, this tells us the price
paid by the buyer. -
Not SyncedPoint D, this tells us the price
received by the seller. -
Not SyncedLet's compare.
-
Not SyncedWhen there was no tax,
the price paid by the buyer -
Not Syncedwas at A and with the tax
the price to the buyer -
Not Syncedgoes up a little bit to point B.
-
Not SyncedThe buyer isn't paying much
of a higher price. -
Not SyncedOn the other hand the seller
is receiving a lot less. -
Not SyncedIn this case, when demand
is more elastic than supply, -
Not Syncedthe demanders pay
a smaller share of the tax -
Not Syncedand the suppliers
pay a larger share. -
Not SyncedTherefore we can just read
off the diagram what happens -
Not Syncedwhen demand
is more elastic than supply. -
Not SyncedYou don't have
to remember the rule, -
Not Syncedyou don't have to memorize it
because I'm going to give you -
Not Syncedsome intuition to make it easy
in just a moment. -
Not SyncedYou simply have to draw the diagram
and be able to read -
Not Syncedthe answer off the curves.
-
Not SyncedLet's look at another case.
-
Not SyncedIn this case, we've drawn
a supply curve which -
Not Syncedis very inelastic
and a demand curve -
Not Syncedwhich is less elastic
than the supply curve. -
Not SyncedOnce again we're going
to take our tax wedge, -
Not Syncedwe're going to push it
into the diagram and what happens? -
Not SyncedYou can see it right here.
-
Not SyncedWe just have to read it
off the diagram. -
Not SyncedNow we see that compared
to when there was no tax, -
Not Syncedthe price to the buyer
has gone up a lot -
Not Syncedand the price to the sellers
has gone down -
Not Syncedby just a little bit.
-
Not SyncedWhen the supply
is more elastic than demand, -
Not Syncedbuyers pay the greater share
of the tax, -
Not Syncedthat is the price to the buyer
goes up more -
Not Syncedthan the price
to the sellers goes down. -
Not SyncedThe buyers pay more of the tax
when the supply curve -
Not Syncedis more elastic.
-
Not SyncedLet's give some intuition.
-
Not SyncedYou can always get the right answer
by drawing the curves. -
Not SyncedAnd let's consider the intuition
for why that's the case. -
Not SyncedSo here's the intuition
for remembering the rule. -
Not SyncedThink about elasticity
as a kind of escape. -
Not SyncedThe side of the market
which is the more elastic -
Not Syncedcan escape the tax more easily.
-
Not SyncedWhy does that makes sense?
Remember what elastic demand means. -
Not SyncedIt means that demanders
have good substitutes -
Not Syncedfor the taxed good
and so they can escape the tax. -
Not SyncedWhen the tax is high,
the demanders are going to say, -
Not Synced"We're just going to go buy
the substitutes. -
Not SyncedWe have plenty
of good substitutes." -
Not SyncedOn the other hand,
think about what it means -
Not Syncedwhen the demand is inelastic.
-
Not SyncedIt means that there
are no good substitutes -
Not Syncedso it's hard to escape to tax.
-
Not SyncedWhat about the supply side,
elastic supply? -
Not SyncedWell, that means the resources
which are used to produce -
Not Syncedthe taxed good,
they can easily be moved -
Not Syncedto other industries.
-
Not SyncedThe resources
can move around easily. -
Not SyncedIf you try to tax the industry
a lot then the land, the capital, -
Not Syncedthe workers in that industry
which were used -
Not Syncedto produce the good,
they're just going to flow -
Not Syncedto other industries
and so the suppliers -
Not Syncedcan relatively easily
escape the tax. -
Not SyncedOn the other hand,
if supply is inelastic -
Not Syncedthat means the resources used
to produce this good, -
Not Syncedthey really can only be used
to produce this good. -
Not SyncedThey're fixed, they're hard
to move around, -
Not Syncedand those factors
are not that useful -
Not Syncedfor producing other goods,
so that makes it difficult -
Not Syncedfor the suppliers
when the supply curve is inelastic. -
Not SyncedThat means it's difficult
for the suppliers -
Not Syncedto escape the tax.
-
Not SyncedWhat if the demanders
and the suppliers -
Not Syncedare both pretty elastic?
-
Not SyncedWell, here's the thing.
-
Not SyncedSomebody has to pay the tax,
both sides can't escape the tax -
Not Syncedat least if the good is going
to be bought and sold, -
Not Syncedtherefore the burden is determined
by the relative elasticities. -
Not SyncedIt's about which side has it easier
to escape the tax -
Not Syncedand that side will pay
less of the tax. -
Not SyncedThe side which is less elastic,
they're going to pay -
Not Syncedmore of the tax
because that side finds it harder -
Not Syncedto escape the tax.
-
Not SyncedSo let's do an application,
say social security taxes. -
Not SyncedLast time we showed
that the legal incidence -
Not Syncedof social security taxes
has no bearing -
Not Syncedon the economic incidence,
but we didn't say -
Not Syncedwhat the economic incidence
actually is. -
Not SyncedSo let's do that now.
-
Not SyncedWe're going to have the price
of labor up here, the wage, -
Not Syncedand the quantity
of labor down here. -
Not SyncedThe whole question
now boils down to -
Not Syncedis the demand for labor,
more elastic -
Not Syncedthan the supply of labor
or vice versa? -
Not SyncedThink about the demanders
of labor, businesses, -
Not Syncedwhat substitutes
for labor do they have? -
Not SyncedIf the price of labor goes up,
what can those businesses do? -
Not SyncedWhat about the supply
of labor, the workers? -
Not SyncedIf their wage goes down,
what can they do? -
Not SyncedIf you think about it,
I think you'll see -
Not Syncedthat for most workers,
especially full time workers, -
Not Syncedthey don't really have a lot
of good substitutes for work. -
Not SyncedMost workers need some kind of job.
-
Not SyncedEven if their wage goes down.
they're going to continue to work -
Not Syncedbecause they need to pay the bills.
-
Not SyncedOn the other hand,
the demanders of labor -
Not Syncedif the wage were to go up,
-
Not Syncedthey could substitute
capital for labor, -
Not Syncedthey could move their investments
to other countries. -
Not SyncedThey have quite a few
good substitutes. -
Not SyncedSo if that's actually how it works,
-
Not Syncedwe should probably draw
the diagram like this -
Not Syncedwith a fairly inelastic
supply of labor -
Not Syncedand a fairly elastic
demand for labor. -
Not SyncedEconomists have done studies
of this and on average -
Not Syncedthis is what they find.
-
Not SyncedSo now think about your FICA taxes,
that's a tax on labor. -
Not SyncedWhat's the effect of that?
-
Not SyncedWell, it's going to look
something like this. -
Not SyncedNotice that the wage
paid by buyers of labor, -
Not Syncedthat's the wage paid
by the firms that goes up -
Not Syncedonly a little bit.
-
Not SyncedOn the other hand,
the wage received -
Not Syncedby the suppliers of labor,
that is the wage -
Not Syncedwhich the workers end up with,
that goes down by a lot. -
Not SyncedAnd this makes perfect sense
when we have a very inelastic -
Not Syncedsupply of labor.
-
Not SyncedThe laborers can't escape
the tax and, therefore, -
Not Syncedthey end up bearing
most of the burden of the tax. -
Not SyncedThis doesn't mean, by the way,
that we shouldn't have -
Not Syncedsocial security taxes.
-
Not SyncedIt may in fact be a good way
of forcing people to save -
Not Syncedfor their own future,
but this does mean -
Not Syncedit is not a free lunch
for the workers. -
Not SyncedThe workers' wages will drop
because of the tax. -
Not SyncedIf we didn't have
the social security tax, -
Not Syncedwages for most workers
would in fact be higher. -
Not SyncedHere's one more application,
health insurance mandates. -
Not SyncedSuppose that the government
requires employers -
Not Syncedto provide health insurance
to their workers -
Not Syncedas is now the case
for many employers -
Not Syncedunder the Affordable Care Act.
-
Not SyncedWho's going to pay for this?
-
Not SyncedWho will end up paying for this?
-
Not SyncedIs it primarily the employers
or primarily the workers? -
Not SyncedIt's really just the same analysis
as we had before. -
Not SyncedA health insurance mandate
is quite similar to a tax. -
Not SyncedA health insurance mandate
simply means that the employers -
Not Syncedhave to pay a higher wage,
but that's just, then, -
Not Syncedthe same as the tax.
-
Not SyncedWhat we just saw
is that if labor supply -
Not Syncedis less elastic than labor demand,
which in many cases makes sense, -
Not Syncedthen in that case most
of the mandate -
Not Syncedwill actually be paid for
by the workers. -
Not SyncedReal wages will fall.
-
Not SyncedAgain this doesn't necessarily mean
that the mandate is a bad idea -
Not Syncedbut it does mean
it's not a free lunch -
Not Syncedfor the workers.
-
Not SyncedThe workers end up paying
for their health care -
Not Syncedthrough the medium of lower wages.
-
Not SyncedTaxes have a couple
of other effects -
Not Syncedincluding the raising of revenue
and also creating -
Not Syncedsome dead weight loss.
-
Not SyncedThose are what we're going
to look at in the next lecture. -
Not Synced- [Narrator] If you want
to test yourself, -
Not Syncedclick Practice questions.
-
Not SyncedOr if you're ready to move on,
just click Next Video. -
Not Synced♪ [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?
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- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 09:07
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Martel Espiritu edited English subtitles for Who Pays the Tax? | ||
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