Policy Levers: Taxes & Subsidies

class: center, middle, inverse, title-slide

# Policy Levers: Taxes & Subsidies
## EC 201: Principles of Microeconomics
### Kyle Raze
### Winter 2020

---

class: inverse, middle

# Prologue

---
# Housekeeping

**Midterm 1:** Grades posted.

- You should have received an email with your score, an approximate grade, and an attachment with your answer choices.

**Optional Short Essays**

- One percentage point of extra credit per essay (up to four total).
- All or nothing grading.
- Open-ended instructions in the syllabus.
- Please edit before submitting.

**Podcasts:** Plan ahead!

- The next few podcasts are relatively long (over an hour).

---
# Taxes

Benjamin Franklin:

> In this world nothing can be said to be certain, except death and taxes.

---
# Policy Levers

Why do governments levy .pink[taxes] and provide .purple[subsidies]?

.pull-left[
## .pink[Taxes]

1. Raise revenue for public goods.

2. Discourage "bad" behaviors.

3. Redistribute income or wealth.
]

.pull-right[
## .purple[Subsidies]

1. Provide economic stimulus.

2. Encourage "good" behaviors.

3. Redistribute income or wealth.
]

---
# Examples Abound

1. Per-unit taxes

- Sin taxes on tobacco, cannabis, and alcohol.
    - Excise taxes on lodging, gasoline, and other goods. 
    - UK's window tax (1696-1851).

2. *Ad valorem* taxes

- Sales taxes.
    - Payroll and income taxes.
    - Property taxes.
    
3. Lump-sum taxes

- License registration fees.
    - UO's incidental fee.

---
# Price Elasticity of Supply

## Definition

> A measure of the responsiveness of quantity supplied to changes in price:

> `$$\epsilon_s = \dfrac{\text{% change in quantity supplied}}{\text{% change in price}} \geq 0$$`

.pull-left[
.purple[**Perfectly Inelastic:**] `$\epsilon_s = 0$`
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-1-1.svg" style="display: block; margin: auto;" />
]

.pull-right[
.purple[**Perfectly Elastic:**] `$\epsilon_s$` .mono[->] `$\infty$`
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-2-1.svg" style="display: block; margin: auto;" />
]

---
class: inverse, middle

# Taxes

---
# Tax on Producers

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-3-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** How does a per-unit tax on producers affect equilibrium price and quantity?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $0.00 </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Q.sub[Market] </td>
   <td style="text-align:center;line-height: 110%;"> 4.5 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> P.sub[Consumer] </td>
   <td style="text-align:center;line-height: 110%;"> $5.50 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> P.sub[Producer] </td>
   <td style="text-align:center;line-height: 110%;"> $5.50 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
</tbody>
</table>

]

---
count: false
# Tax on Producers

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-5-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** How does a per-unit tax on producers affect equilibrium price and quantity?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $0.00 </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Q.sub[Market] </td>
   <td style="text-align:center;line-height: 110%;"> 4.5 </td>
   <td style="text-align:center;line-height: 110%;"> 3 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> P.sub[Consumer] </td>
   <td style="text-align:center;line-height: 110%;"> $5.50 </td>
   <td style="text-align:center;line-height: 110%;"> $7.00 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> P.sub[Producer] </td>
   <td style="text-align:center;line-height: 110%;"> $5.50 </td>
   <td style="text-align:center;line-height: 110%;"> $4.00 </td>
  </tr>
</tbody>
</table>

]

---
# Tax on Producers

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-7-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** How does a per-unit tax on producers affect equilibrium price and quantity?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $0.00 </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Q.sub[Market] </td>
   <td style="text-align:center;line-height: 110%;"> 4.5 </td>
   <td style="text-align:center;line-height: 110%;"> 3 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> P.sub[Consumer] </td>
   <td style="text-align:center;line-height: 110%;"> $5.50 </td>
   <td style="text-align:center;line-height: 110%;"> <font color="#e64173">$7.00</font> </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> P.sub[Producer] </td>
   <td style="text-align:center;line-height: 110%;"> $5.50 </td>
   <td style="text-align:center;line-height: 110%;"> <font color="#e64173">$4.00</font> </td>
  </tr>
</tbody>
</table>

.pink[Price wedge!]
]

---
# Tax on Producers

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-9-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** How does a per-unit tax on producers affect total surplus in an efficient market?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $0.00 </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> CS </td>
   <td style="text-align:center;line-height: 110%;"> $10.125 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> PS </td>
   <td style="text-align:center;line-height: 110%;"> $10.125 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> GR </td>
   <td style="text-align:center;line-height: 110%;"> $0.00 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:left;"> TS </td>
   <td style="text-align:center;"> $20.25 </td>
   <td style="text-align:center;"> $ \qquad \, \ \ $ </td>
  </tr>
</tbody>
</table>
]

---
count: false
# Tax on Producers

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-11-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** How does a per-unit tax on producers affect total surplus in an efficient market?

]

---
# Deadweight Loss

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-13-1.svg" style="display: block; margin: auto;" />
]

.less-right[

## Definition

> The .orange[decrease in total surplus] caused by market distortions.

]

---
# Tax on Consumers

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-14-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** How does a per-unit tax on consumers affect equilibrium price and quantity?

]

---
count: false
# Tax on Consumers

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-16-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** How does a per-unit tax on consumers affect equilibrium price and quantity?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $0.00 </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Q.sub[Market] </td>
   <td style="text-align:center;line-height: 110%;"> 4.5 </td>
   <td style="text-align:center;line-height: 110%;"> 3 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> P.sub[Consumer] </td>
   <td style="text-align:center;line-height: 110%;"> $5.50 </td>
   <td style="text-align:center;line-height: 110%;"> $7.00 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> P.sub[Producer] </td>
   <td style="text-align:center;line-height: 110%;"> $5.50 </td>
   <td style="text-align:center;line-height: 110%;"> $4.00 </td>
  </tr>
</tbody>
</table>

]

---
# Tax on Consumers

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-18-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** How does a per-unit tax on consumers affect equilibrium price and quantity?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $0.00 </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Q.sub[Market] </td>
   <td style="text-align:center;line-height: 110%;"> 4.5 </td>
   <td style="text-align:center;line-height: 110%;"> 3 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> P.sub[Consumer] </td>
   <td style="text-align:center;line-height: 110%;"> $5.50 </td>
   <td style="text-align:center;line-height: 110%;"> <font color="#e64173">$7.00</font> </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> P.sub[Producer] </td>
   <td style="text-align:center;line-height: 110%;"> $5.50 </td>
   <td style="text-align:center;line-height: 110%;"> <font color="#e64173">$4.00</font> </td>
  </tr>
</tbody>
</table>

.pink[Price wedge!]
]

---
# Tax on Consumers

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-20-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** How does a per-unit tax on consumers affect total surplus in an efficient market?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $0.00 </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> CS </td>
   <td style="text-align:center;line-height: 110%;"> $10.125 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> PS </td>
   <td style="text-align:center;line-height: 110%;"> $10.125 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> GR </td>
   <td style="text-align:center;line-height: 110%;"> $0.00 </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:left;"> TS </td>
   <td style="text-align:center;"> $20.25 </td>
   <td style="text-align:center;"> $ \qquad \, \ \ $ </td>
  </tr>
  <tr>
   <td style="text-align:left;"> DWL </td>
   <td style="text-align:center;"> $0.00 </td>
   <td style="text-align:center;">  </td>
  </tr>
</tbody>
</table>
]

---
count: false
# Tax on Consumers

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-22-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** How does a per-unit tax on consumers affect total surplus in an efficient market?

]

---
# Tax Incidence

## Statutory Incidence

> The group of individuals who must remit a particular tax to the government.

- Who pays the tax?

## Tax Incidence

> The distribution of the burden of a particular tax among consumers and producers.

- Who really pays the tax?

---
# Tax Incidence

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-24-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** Who bears the burden of a tax on producers?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Consumer Burden </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Producer Burden </td>
   <td style="text-align:center;line-height: 110%;">  </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> GR </td>
   <td style="text-align:center;line-height: 110%;"> $9.00 </td>
  </tr>
</tbody>
</table>

]

---
count: false
# Tax Incidence

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-26-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** Who bears the burden of a tax on producers?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Consumer Burden </td>
   <td style="text-align:center;line-height: 110%;"> $4.50 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Producer Burden </td>
   <td style="text-align:center;line-height: 110%;"> $4.50 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> GR </td>
   <td style="text-align:center;line-height: 110%;"> $9.00 </td>
  </tr>
</tbody>
</table>

]

---
# Tax Incidence

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-28-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** Who bears the burden of a tax on consumers?

]

---
count: false
# Tax Incidence

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-30-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** Who bears the burden of a tax on consumers?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Consumer Burden </td>
   <td style="text-align:center;line-height: 110%;"> $4.50 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Producer Burden </td>
   <td style="text-align:center;line-height: 110%;"> $4.50 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> GR </td>
   <td style="text-align:center;line-height: 110%;"> $9.00 </td>
  </tr>
</tbody>
</table>

]

---
# Tax Incidence

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-32-1.svg" style="display: block; margin: auto;" />
]

.less-right[

.pink[Tax incidence **does not** depend on whether the government levies the tax on producers or consumers!]

]

---
# Tax Incidence

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-33-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** If statutory incidence does not determine tax incidence, what does?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Consumer Burden </td>
   <td style="text-align:center;line-height: 110%;"> $2.50 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Producer Burden </td>
   <td style="text-align:center;line-height: 110%;"> $12.50 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> GR </td>
   <td style="text-align:center;line-height: 110%;"> $15.00 </td>
  </tr>
</tbody>
</table>

]

---
# Tax Incidence

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-35-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** If statutory incidence does not determine tax incidence, what does?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:left;"> Tax </th>
   <th style="text-align:center;"> $3.00 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Consumer Burden </td>
   <td style="text-align:center;line-height: 110%;"> $4.00 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> Producer Burden </td>
   <td style="text-align:center;line-height: 110%;"> $2.00 </td>
  </tr>
  <tr>
   <td style="text-align:left;line-height: 110%;"> GR </td>
   <td style="text-align:center;line-height: 110%;"> $6.00 </td>
  </tr>
</tbody>
</table>

]

---
# Tax Incidence

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-37-1.svg" style="display: block; margin: auto;" />
]

.less-right[

**Q:** If statutory incidence does not determine tax incidence, what does?

**A:** .pink[The relative price elasticities of demand and supply!]
<br> .pink[.mono[-->] Inelastic side of the market bears more of the burden.]

]

---
# Tax Rates and Revenue

.more-left[
<img src="07-Policy_Taxes_Subsidies_files/figure-html/unnamed-chunk-38-1.svg" style="display: block; margin: auto;" />
]