Authors libby rittenberg 817
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nearly as great as the amount of the tax. In Panel (b), we have the same
demand curve as in Panel (a), but with a relatively inelastic supply
curve S2. This time the price paid by buyers barely rises; sellers bear most
of the burden of the tax. When the supply curve is relatively elastic, the
bulk of the tax burden is borne by buyers. When supply is relatively
inelastic, the bulk of the burden is borne by sellers.
Panels (c) and (d) of the exhibit show the same tax imposed in markets
with identical supply curves S1. With a relatively elastic demand
curve D1 in Panel (c) (notice that we are in the upper half, that is, the
elastic portion of the curve), most of the tax burden is borne by sellers.
With a relatively inelastic demand curve D1 in Panel (d) (notice that we are
in the lower half, that is, the inelastic portion of the curve), most of the
burden is borne by buyers. If demand is relatively elastic, then sellers bear
more of the burden of the tax. If demand is relatively inelastic, then buyers
bear more of the burden.
The Congressional Budget Office (CBO) has prepared detailed studies of
the federal tax system. Using the tax laws in effect in August 2004, it
ranked the U.S. population according to income and then divided the
population into quintiles (groups containing 20% of the population). Then,
given the federal tax burden imposed by individual income taxes, payroll
taxes for social insurance, corporate income taxes, and excise taxes on
each quintile and the income earned by people in that quintile, it projected
the average tax rate facing that group in 2006. The study assigned taxes on
the basis of who bears the burden, not on who pays the tax. For example,
many studies argue that, even though businesses pay half of the payroll
taxes, the burden of payroll taxes actually falls on households. The reason
is that the supply curve of labor is relatively inelastic, as shown in Panel
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
817
