Recall from our discussion of tax incidence that the incidence of a tax refers to its ultimate economic burden and to its total effect on prices, outputs, and other economic magnitudes. Below are some incidence questions that can be answered using supply and demand.
Use graphs to explain your answers.
a. In the 1993 Budget Act, Congress raised federal gasoline taxes by 4.3 cents a gallon. Assuming the wholesale price of gasoline is determined in world markets, what is the relative impact of the tax on American producers and consumers?
b. Social insurance taxes are generally levied on labor earnings. What is their incidence if labor supply is perfectly inelastic? If labor supply is back ward bending?
c. Assume that firms must earn a given post-tax rate of return on investment, where the return is determined in world capital markets. What is the incidence of a tax on corporate income in a small open economy?