Effect of sales tax on economic surplus: Difference between revisions
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* How does the consumer surplus in the presence of a sales tax compare with the consumer surplus in the absence of a sales tax? If the values differ, what accounts for this difference? How much of this difference is captured by the government through tax, nd how much of it takes the form of [[deadweight loss due to taxation|deadweight loss]]? | * How does the consumer surplus in the presence of a sales tax compare with the consumer surplus in the absence of a sales tax? If the values differ, what accounts for this difference? How much of this difference is captured by the government through tax, nd how much of it takes the form of [[deadweight loss due to taxation|deadweight loss]]? | ||
* How does the social surplus in the presence of a sales tax compare with the social surplus in the absence of a sales tax? If the values differ, what accounts for this difference? How much of this difference is captured by the government through tax, nd how much of it takes the form of [[deadweight loss due to taxation|deadweight loss]]? | * How does the social surplus in the presence of a sales tax compare with the social surplus in the absence of a sales tax? If the values differ, what accounts for this difference? How much of this difference is captured by the government through tax, nd how much of it takes the form of [[deadweight loss due to taxation|deadweight loss]]? | ||
==Assumptions== | |||
Prior to beginning the analysis, we note the following: | |||
# A sales tax may be ''price-proportional'' (proportional to the price of the trade) or ''quantity-proportional'' (proportional to the quantity being traded). The quantitative analysis differs somewhat in both these cases. However, the qualitative analysis largely does not. | |||
# In this article, we largely focus on the effect of the ''introduction'' of a sales tax, by performing [[comparative statics]] between a world without sales tax and a world with sales tax. Much of this analysis can also be applied to ''increases'' in sales tax. Conversely, a ''decrease'' in, or ''elimination'' of, a sales tax should have the opposite effect. | |||
# For the most part, we focus on short run effects. In particular, this means that we assume the [[law of demand]] and [[law of supply]]. | |||
# We assume away the costs of compliance with the tax laws, and do not deal with issues of tax evasion. | |||
# For the most part, we assume competitive markets (though we also discuss other cases). Hence, the [[law of one price]] is assumed to hold, so that we can talk of ''the'' market price. | |||
==Effect of sales tax on a single good with a competitive market== | |||
Revision as of 20:16, 21 February 2012
This article attempts to discuss the effects of a sales tax on the social surplus. The reference point for studying these effects is a world without the sales tax, where the price is the market price and the quantity traded is the equilibrium quantity traded at that market price.
In a world without the sales tax, we have (assuming away external costs and external benefits):
social surplus in absence of sales tax = (producer surplus in absence of sales tax)+ (consumer surplus in absence of sales tax)
The introduction of the sales tax introduces a third party into the equation: the taxing authority, which we call the government.
social surplus in presence of sales tax = (producer surplus in presence of sales tax)+ (consumer surplus in presence of sales tax)
The goal is to ask the questions:
- How does the producer surplus in the presence of a sales tax compare with the producer surplus in the absence of a sales tax? If the values differ, what accounts for this difference? How much of this difference is captured by the government through tax, nd how much of it takes the form of deadweight loss?
- How does the consumer surplus in the presence of a sales tax compare with the consumer surplus in the absence of a sales tax? If the values differ, what accounts for this difference? How much of this difference is captured by the government through tax, nd how much of it takes the form of deadweight loss?
- How does the social surplus in the presence of a sales tax compare with the social surplus in the absence of a sales tax? If the values differ, what accounts for this difference? How much of this difference is captured by the government through tax, nd how much of it takes the form of deadweight loss?
Assumptions
Prior to beginning the analysis, we note the following:
- A sales tax may be price-proportional (proportional to the price of the trade) or quantity-proportional (proportional to the quantity being traded). The quantitative analysis differs somewhat in both these cases. However, the qualitative analysis largely does not.
- In this article, we largely focus on the effect of the introduction of a sales tax, by performing comparative statics between a world without sales tax and a world with sales tax. Much of this analysis can also be applied to increases in sales tax. Conversely, a decrease in, or elimination of, a sales tax should have the opposite effect.
- For the most part, we focus on short run effects. In particular, this means that we assume the law of demand and law of supply.
- We assume away the costs of compliance with the tax laws, and do not deal with issues of tax evasion.
- For the most part, we assume competitive markets (though we also discuss other cases). Hence, the law of one price is assumed to hold, so that we can talk of the market price.