The Costs of Taxation: How Taxes Affect Surplus and Deadweight Loss

1. 8 Application: The Costs of Taxation응용: 조세의 비용 Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich

2. In this chapter, look for the answers to these questions: • How does a tax affect consumer surplus, producer surplus, and total surplus? 세금은 어떻게 소비자잉여, 생산자잉여, 총잉여에 영향을 주는가? • What is the deadweight loss of a tax? 조세의 경제적 순손실은 무엇인가? • What factors determine the size of this deadweight loss? 어떤 요인들이 이 경제적 순손실의 규모를 결정하는가? • How does tax revenue depend on the size of the tax? 조세수입은 세금의 크기와 어떤 관계를 가지는가? 1

3. Review from Chapter 6 A tax 세금 drives a wedge between the price buyers pay and the price sellers receive. 구매자가 지불하는 가격과 판매자가 받는 가격 간의 괴리를 가져옴 raises the price buyers pay and lowers the price sellers receive. 구매자가 지불하는 가격을 올리고 판매자가 받는 가격을 내림 reduces the quantity bought & sold. 거래량을 감소시킴 These effects are the same whether the tax is imposed on buyers or sellers, so we do not make this distinction in this chapter. 세금이 구매자에게 부과되든 판매자에게 부과되든 이런 효과는 동일하므로 8장에서는 이를 구분하지 않음 APPLICATION: THE COSTS OF TAXATION

4. The Effects of a Tax P Size of tax = $T S PB PE PS D Q QT QE Eq’m with no tax: 세금이 없을 때 균형 Price = PE Quantity = QE Eq’m with tax = $T per unit: 세금이 단위당 $T일 때 균형 Buyers pay PB Sellers receive PS Quantity = QT APPLICATION: THE COSTS OF TAXATION

5. The Effects of a Tax P Size of tax = $T PB PS Q Revenue from tax: $T x QT S PE D QT QE APPLICATION: THE COSTS OF TAXATION

6. The Effects of a Tax Next, we apply welfare economics to measure the gains and losses from a tax. 후생경제학을 적용하여 세금의 이득과 손실을 측정 We determine consumer surplus (CS), producer surplus (PS), tax revenue, and total surplus with and without the tax. 세금이 있을 때와 없을 때의 소비자잉여, 생산자잉여, 조세수입, 총잉여를 결정 Tax revenue can fund beneficial services (e.g., education, roads, police) so we include it in total surplus. 조세수입은 유익한 서비스(예를 들어 교육, 도로, 경찰)의 재원이 되므로 이를 총잉여에 포함 APPLICATION: THE COSTS OF TAXATION

7. The Effects of a Tax P S PE D Q QE Without a tax, CS = A + B + C PS = D + E + F A Tax revenue = 0 B C Total surplus= CS + PS = A + B + C + D + E + F E D F QT APPLICATION: THE COSTS OF TAXATION

8. The Effects of a Tax P PB PS Q With the tax, CS = A PS = F A Tax revenue = B + D S B C Total surplus= A + B + D + F E D D F The tax reduces total surplus by C + E QT QE APPLICATION: THE COSTS OF TAXATION

9. The Effects of a Tax P PB PS Q C + E is called the deadweight loss (DWL) of the tax, the fall in total surplus that results from a market distortion, such as a tax. C+ E를 조세의 순손실이라 하는데 , 조세와 같은 시장왜곡으로부터 발생하는 총잉여의 감소를 의미 A S B C E D D F QT QE APPLICATION: THE COSTS OF TAXATION

10. About the Deadweight Loss P PB PS Q Because of the tax, the units between QT and QE are not sold. 세금 때문에 QT와QE사이의 수량이 판매되지 않음 The value of these units to buyers is greater than the cost of producing them, 이 수량은 구매자에 대한 가치가 생산비용보다 높고 so the tax prevents some mutually beneficial trades. 따라서 조세는 상호이익이 되는 거래를 막음 S D QT QE APPLICATION: THE COSTS OF TAXATION

11. P $ S D Q A C T I V E L E A R N I N G 1Analysis of tax The market for airplane tickets A.Compute CS, PS, and total surplus without a tax. B.If $100 tax per ticket, compute CS, PS, tax revenue, total surplus, and DWL. 10

12. P $ S P = D Q A C T I V E L E A R N I N G 1Answers to A The market for airplane tickets CS = ½ x $200 x 100 = $10,000 PS = ½ x $200 x 100 = $10,000 Total surplus = $10,000 + $10,000 = $20,000 11

13. P $ S PB = PS = D Q A C T I V E L E A R N I N G 1Answers to B A $100 tax on airplane tickets CS = ½ x $150 x 75 = $5,625 PS = $5,625 Tax revenue = $100 x 75 = $7,500 Total surplus = $18,750 DWL = $1,250 12

14. What Determines the Size of the DWL? Which goods or services should govt tax to raise the revenue it needs? 정부가 필요한 수입을 늘리기 위해 어떤 재화나 서비스에 세금을 물려야 하는가? One answer: those with the smallest DWL. 경제적 순손실이 가장 작은 재화나 서비스가 하나의 대답이 될 수 있다. When is the DWL small vs. large? 언제 경제적 순손실이 크거나 작은가?Turns out it depends on the price elasticities of supply and demand. 그것은 수요 공급의 탄력성에 달려 있는 것으로 보인다. Recall: The price elasticity of demand (or supply) measures how much QD (or QS) changes when P changes. 수요나 공급의 가격탄력성은 가격이 변할 때 수요량 또는 공급량이 얼마나 변하는지를 측정한다는 것을 상기하라. APPLICATION: THE COSTS OF TAXATION

15. When supply is inelastic, it’s harder for firms to leave the market when the tax reduces PS. 공급이 비탄력적이면 세금으로 Ps가 내릴 때 기업들은 시장을 떠나기 어렵다. So, the tax only reduces Q a little, and DWL is small. 따라서 세금은 거래량을 약간 감소시킬 뿐이고 경제적 순손실도 작다. DWL and the Elasticity of Supply P S Size of tax D Q APPLICATION: THE COSTS OF TAXATION

16. DWL and the Elasticity of Supply P S Size of tax D Q The more elastic is supply, the easier for firms to leave the market when the tax reduces PS, 공급이 탄력적 일수록 세금으로 Ps가 내릴 때 기업들은 시장을 떠나기 쉽고 the greater Q falls below the surplus-maximizing quantity, the greater the DWL. 거래량은 총잉여를 극대화하는 수량 아래로 더 크게 떨어지며, 경제적 순손실도 커진다. APPLICATION: THE COSTS OF TAXATION

17. DWL and the Elasticity of Demand P S Size of tax D Q When demand is inelastic, it’s harder for consumers to leave the market when the tax raises PB. 수요가 비탄력적이면 세금으로 PB가 오를 때 소비자들은 시장을 떠나기 어렵다. So, the tax only reduces Q a little, and DWL is small. 따라서 세금은 거래량을 약간 감소시킬 뿐이고 경제적 순손실도 작다. APPLICATION: THE COSTS OF TAXATION

18. DWL and the Elasticity of Demand P S Size of tax D Q The more elastic is demand, the easier for buyers to leave the market when the tax increases PB, 수요가 탄력적일수록 세금으로 PB가 오를 때 구매자들은 시장을 떠나기 쉽고, the more Q falls below the surplus-maximizing quantity, and the greater the DWL. 거래량은 총잉여를 극대화하는 수량 아래로 더 크게 떨어지며 경제적 순손실도 커진다. APPLICATION: THE COSTS OF TAXATION

19. A C T I V E L E A R N I N G 2Elasticity and the DWL of a tax Would the DWL of a tax be larger if the tax were on: A. Breakfast cereal or sunscreen? B. Hotel rooms in the short run or hotel rooms in the long run? C. Groceries or meals at fancy restaurants? 18

20. A C T I V E L E A R N I N G 2Answers A. Breakfast cereal or sunscreen From Chapter 5: Breakfast cereal has more close substitutes than sunscreen, so demand for breakfast cereal is more price-elastic than demand for sunscreen. So, a tax on breakfast cereal would cause a larger DWL than a tax on sunscreen. 19

21. A C T I V E L E A R N I N G 2Answers B. Hotel rooms in the short run or long run From Chapter 5: The price elasticities of demand and supply for hotel rooms are larger in the long run than in the short run. So, a tax on hotel rooms would cause a larger DWL in the long run than in the short run. 20

22. A C T I V E L E A R N I N G 2Answers C. Groceries or meals at fancy restaurants From Chapter 5: Groceries are more of a necessity and therefore less price-elastic than meals at fancy restaurants. So, a tax on restaurant meals would cause a larger DWL than a tax on groceries. 21

23. A C T I V E L E A R N I N G 3Discussion question • The government must raise tax revenue to pay for schools, police, etc. To do this, it can either tax groceries or meals at fancy restaurants. • Which should it tax? 22

24. How Big Should the Government Be? 정부는 얼마나 커야 할까? A bigger government provides more services, but requires higher taxes, which cause DWLs. 더 큰 정부는 더 많은 서비스를 제공하지만 세금을 많이 거둘 필요가 있고, 이는 경제적 순손실을 초래 The larger the DWL from taxation, the greater the argument for smaller government. 조세의 경제적 순손실이 클수록 작은 정부를 더 옹호 The tax on labor income is especially important; it’s the biggest source of govt revenue. 근로소득세는 특히 중요, 정부수입의 가장 큰 원천 For the typical worker, the marginal tax rate (the tax on the last dollar of earnings) is about 40%. 전형적 근로자의 한계세율은 약 40% How big is the DWL from this tax? 이 세금의 경제적 순손실은 얼마나 큰가?It depends on elasticity…. 그것은 탄력성에 의존 APPLICATION: THE COSTS OF TAXATION

25. How Big Should the Government Be? If labor supply is inelastic, then this DWL is small. 노동공급이 비탄력적이면 경제적 순손실은 작다. Some economists believe labor supply is inelastic, arguing that most workers work full-time regardless of the wage. 어떤 경제학자들은 노동공급이 비탄력적이라고 생각하며, 그 근거로 대부분의 근로자들이 임금과 무관하게 풀타임 근무를 한다는 것을 제시 APPLICATION: THE COSTS OF TAXATION

26. How Big Should the Government Be? Other economists believe labor taxes are highly distorting because some groups of workers have elastic supply and can respond to incentives: 다른 경제학자들은 근로소득세의 왜곡효과가 매우 크다고 생각하는데, 왜냐하면 어떤 근로자 집단은 노동공급이 탄력적이어서 인센티브에 반응하기 때문 Many workers can adjust their hours, e.g., by working overtime. 많은 근로자들이 노동시간을 조절, 가령 초과근무 Many families have a 2nd earner with discretion over whether and how much to work. 많은 가정이 맞벌이에 나서기도 Many elderly choose when to retire based on the wage they earn. 많은 노인들이 임금에 따라 은퇴시기를 결정 Some people work in the “underground economy” to evade high taxes. 어떤 사람들은 높은 세금을 피하기 위해 지하경제 활동 APPLICATION: THE COSTS OF TAXATION

27. The Effects of Changing the Size of the Tax Policymakers often change taxes, raising some and lowering others. 정책담당자들은 종종 세금을 변경시켜 어떤 것은 올리고 어떤 것은 내림 What happens to DWL and tax revenue when taxes change? We explore this next…. 세금이 변하면 경제적 순손실과 조세수입에는 무슨 일이 발생할까? 이제부터 이 문제를 탐구 APPLICATION: THE COSTS OF TAXATION

28. DWL and the Size of the Tax P new DWL S T 2T D initial DWL Q Q1 Q2 Initially, the tax is T per unit. 처음에는 세금이 단위당 T Doubling the tax causes the DWL to more than double. 세금을 2배로 올리면 경제적 순손실은 2배를 초과 APPLICATION: THE COSTS OF TAXATION

29. DWL and the Size of the Tax new DWL P S 3T D initial DWL Q Q3 Q1 Initially, the tax is T per unit. 처음에는 세금이 단위당 T Tripling the tax causes the DWL to more than triple. 세금을 3배로 올리면 경제적 순손실은 3배를 초과 T APPLICATION: THE COSTS OF TAXATION

30. DWL and the Size of the Tax DWL Tax size Summary When a tax increases, DWL rises even more. Implication When tax rates are low, raising them doesn’t cause much harm, and lowering them doesn’t bring much benefit. 세율이 낮을 때는 세율을 올려도 손해가 크지 않고 세율을 내려도 이익이 크지 않음 When tax rates are high, raising them is very harmful, and cutting them is very beneficial. 세율이 높을 때는 세율을 올리면 손해가 매우 크고 세율을 내리면 이익이 매우 큼 APPLICATION: THE COSTS OF TAXATION

31. Revenue and the Size of the Tax P PB S PB T 2T PS D PS Q Q1 Q2 0 When the tax is small, increasing it causes tax revenue to rise. 세금이 작을 때는 세금을 늘리면 조세수입이 증가 APPLICATION: THE COSTS OF TAXATION

32. Revenue and the Size of the Tax P PB PB S 3T D PS PS Q Q3 Q2 0 When the tax is larger, increasing it causes tax revenue to fall.세금이 클 때는 세금을 늘리면 조세수입이 감소 2T APPLICATION: THE COSTS OF TAXATION

33. Revenue and the Size of the Tax Tax revenue Tax size 0 The Laffer curve shows the relationship between the size of the tax and tax revenue. 래퍼곡선은 세금의 크기와 조세수입 간의 관계를 보여줌 The Laffer curve APPLICATION: THE COSTS OF TAXATION

34. CHAPTER SUMMARY • A tax on a good reduces the welfare of buyers and sellers. This welfare loss usually exceeds the revenue the tax raises for the govt. • The fall in total surplus (consumer surplus, producer surplus, and tax revenue) is called the deadweight loss (DWL) of the tax. • A tax has a DWL because it causes consumers to buy less and producers to sell less, thus shrinking the market below the level that maximizes total surplus. 33

35. CHAPTER SUMMARY • The price elasticities of demand and supply measure how much buyers and sellers respond to price changes. Therefore, higher elasticities imply higher DWLs. • An increase in the size of a tax causes the DWL to rise even more. • An increase in the size of a tax causes revenue to rise at first, but eventually revenue falls because the tax reduces the size of the market. 34