Authors libby rittenberg 823
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Look again at our 60-year-old couple. It faces a very high marginal tax rate.
A younger couple with the same income actually faces a negative marginal
tax rate—increasing its labor income by a dollar actually increases its
after-tax income by more than a dollar. Why the difference? The
economists assumed that the younger couple would have children and
thus qualify for a variety of programs, including the Earned Income Tax
Credit. The couple at age 60 still faces the dollar-for-dollar reduction in
payments in the Food Stamp program. No one designed these marginal
incentives. They simply emerge from the bewildering mix of welfare and
tax programs households face.
ANSWER TO TRY IT! PROBLEM
The tax adds a $20 wedge between the price paid by buyers and
received by sellers. In Panel (a), the price rises to $120; the entire
burden is borne by buyers. In Panel (c), the price remains $100; sellers
receive just $80. Therefore, sellers bear the burden of the tax. In Panel
(b), the price rises by less than $20, and the burden is shared by
buyers and sellers. The relative elasticities of demand and supply
determine whether the tax is borne primarily by buyers or sellers, or
shared equally by both groups.
Figure 15.10
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
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