ECON 369 - Public Sector Economics

In Class Exercise Eleven - Tax Analysis - Applications

1.  What is an excise tax?

2.  Graphically and in words explain who will bear the burden (incidence) of an excise tax on whiskey - given the following information:

a.  both demand and supply are "normally sloped"

b.  the market price before the tax is levied is $10 per bottle and the amount sold is 9,000 bottles

c.  the per bottle excise tax = $2.00

d.  the price that sellers keep after the excise tax is levied is $9.50

e.  the amount of bottles sold after the tax is levied is 8,200 bottles

Graph:

How much tax revenue does this generate for the government?

On your graph -- is there a "welfare loss" - show on the graph and explain why it exists.

Assume that whiskey and rum are pretty close substitutes for many people.  Graphically and in words, explain what might happen in the rum market due to the excise tax on whiskey. 

Graph:

Think of yet another economic incidence that would follow from this excise tax.

2.  Explain why the rate of return on non-corporate capital might decrease when the corporate income tax is levied. 

3.  Explain the circumstances under which workers might lose in the long run when a corporate income tax is levied.

4.  Graphically and in words explain why workers might pay more than half of a payroll tax -- even though the 50/50 split is mandated by congress.

5.  Do you have any other questions over this material?