Transcript Slide 1

In this experiment, three people are assigned to a single role. Find your
teammates and sit together.
Remember: You are competing against the other teams.
Student
Adhikari
Aldrich
Andrei
Austin
Barros
Barrows
Bell
Bernier Arcand
Boskovski
Buchanan
Calise
Chang
Choi
Crail
Crooks
Dhar
Diggs
DiMaggio
Ennis
Galvez
Grape
Guzenko
Harning
Harris
Herman
Huerter
Inden
Johnson
Kotkin
Samrachana
Laura
Amanda
Ben
Katie
Christie
David
Philippe
Joe
Joy
Cristina
Elizabeth
Moses
Drew
Ashley
Sreyashe
Amy
Vanessa
Sean
Xondra
Richard
Maria
Brian
Brandon
Lisa
John
Margaret
Jennifer
Rachel
Score to Date
Role
44
61
85
101
106
133
128
104
92
115
59
133
68
57
83
102
94
16
78
65
181
44
63
64
72
171
105
167
93
Firm 1
Firm 1
Firm 1
Firm 2
Firm 2
Firm 2
Firm 3
Firm 3
Firm 3
Firm 4
Firm 4
Firm 4
Firm 5
Firm 5
Firm 5
Firm 6
Firm 6
Firm 6
Firm 7
Firm 7
Firm 7
Firm 8
Firm 8
Firm 8
Firm 9
Firm 9
Firm 9
Firm 10
Firm 10
Student
LeFebvre
Vogelgesang
McClutchy
Nguyen
Peterson
Potter
Potter
Powell
Quinn
Rosenthal
Scott
Shivers
Smith
Smith
Sriram
Stegman
Stewart
Sung
Syeddah
Sylaj
Thompson
Turcotte
Tushe
Ueyama
Underwood
Vasilyev
Wang
Yee
Zhang
Nichole
Jimmy
Sarah
Helen
Jenna
Sarah
Dylan
Andrew
Abigail
Evan
Katherine
Tionya
Julie
Ross
Matt
Robert
Michaela
Vannie
Ayesha
Adelina
Jessica
Scott
Isida
Kimberly
Brittany
Pavel
Jusy
Natalie
Di
Score to Date
Role
51
76
43
21
85
64
16
67
27
200
19
109
95
30
162
60
83
18
113
11
83
90
42
108
114
59
115
76
84
Firm 10
Firm 11
Firm 11
Firm 11
Firm 12
Firm 12
Firm 12
Firm 13
Firm 13
Firm 13
Firm 14
Firm 14
Firm 14
Firm 15
Firm 15
Firm 15
Firm 16
Firm 16
Firm 16
Firm 17
Firm 17
Firm 17
Firm 18
Firm 18
Firm 18
Firm 19
Firm 19
Firm 19
Firm 19
1
The Players and the Goals
In this experiment, each team controls a firm that sells to a
group of consumers.
FIRMS select what price to charge.
 Lower price means consumers purchase more units.
 Higher price means consumers purchase fewer units.
2
The Players and the Goals
Goal: make the most profit possible.
Profit = Revenue – Cost
(Price per unit) (Units sold)
($1) (Units sold)
(Tax per unit) (Units Sold)
3
Example
You will see a demand
schedule like the one to
the right.
The chart shows the
number of units you will
sell depending on what
price you decide to charge.
For example, if you charge
$0.50, you will sell 940
units.
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
940
930
920
910
900
890
880
870
860
850
840
830
820
810
800
790
780
770
760
750
740
730
720
710
700
690
680
670
660
650
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
640
630
620
610
600
590
580
570
560
550
540
530
520
510
500
490
480
470
460
450
440
430
420
410
400
390
380
370
360
350
You must choose what
price to charge for your
product so as to maximize
your profit.
4
Example
Suppose you charge
$10.00 per unit.
How many units will you
sell?
750
What is your revenue?
($10.00) (750) = $7,500
What is your cost?
($1.00) (750) = $750
What is your profit?
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
940
930
920
910
900
890
880
870
860
850
840
830
820
810
800
790
780
770
760
750
740
730
720
710
700
690
680
670
660
650
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
640
630
620
610
600
590
580
570
560
550
540
530
520
510
500
490
480
470
460
450
440
430
420
410
400
390
380
370
360
350
$7,500 – $750 = $6,750
5
Example
Suppose you charge
$20.00 per unit.
How many units will you
sell?
550
What is your revenue?
($20.00) (550) = $11,000
What is your cost?
($1.00) (550) = $550
What is your profit?
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
940
930
920
910
900
890
880
870
860
850
840
830
820
810
800
790
780
770
760
750
740
730
720
710
700
690
680
670
660
650
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
640
630
620
610
600
590
580
570
560
550
540
530
520
510
500
490
480
470
460
450
440
430
420
410
400
390
380
370
360
350
$11,000 – $550 = $10,450
6
Example
Suppose you charge
$30.00 per unit.
How many units will you
sell?
350
What is your revenue?
($30.00) (350) = $10,500
What is your cost?
($1.00) (350) = $350
What is your profit?
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
940
930
920
910
900
890
880
870
860
850
840
830
820
810
800
790
780
770
760
750
740
730
720
710
700
690
680
670
660
650
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
640
630
620
610
600
590
580
570
560
550
540
530
520
510
500
490
480
470
460
450
440
430
420
410
400
390
380
370
360
350
$11,000 – $550 = $10,150
7
Example
Suppose you charge
$10.00 per unit.
Profit = $6,750
Suppose you charge
$20.00 per unit.
Profit = $10,450
Suppose you charge
$30.00 per unit.
Profit = $10,150
Of these three prices,
$20.00 is the best price to
charge.
8
Round 1
Choose the
price you will
charge for your
product.
Every unit you
sell costs you
$1 to produce.
There is no tax.
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
9
Round 1
Firms' Profits
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
10
Statutory vs. Economic Tax Burden (or tax incidence)
Statutory tax burden is the amount of tax collected from a person.
Economic tax burden is the amount of tax paid by a person.
Example:
•
With no taxes, the price of gas is $3.00 per gallon.
•
The government imposes a 50 cent per gallon tax on gasoline.
•
The tax is collected from the producer.
•
In response to the tax, the producer raises the price of gas to $3.50.
Who bears the statutory and economic burdens of the tax?
 Statutory burden is on the producer, but economic burden is on the
consumer.
11
Statutory vs. Economic Tax Burden (or tax incidence)
Statutory tax burden is the amount of tax collected from a person.
Economic tax burden is the amount of tax paid by a person.
Example:
•
With no taxes, the price of gas is $3.00 per gallon.
•
The government imposes a 50 cent per gallon tax on gasoline.
•
The tax is collected from the producer.
•
In response to the tax, the producer does not change the price of gas.
Who bears the statutory and economic burdens of the tax?
 Statutory burden is on the producer and economic burden is on the
producer.
12
Statutory vs. Economic Tax Burden (or tax incidence)
Statutory tax burden is the amount of tax collected from a person.
Economic tax burden is the amount of tax paid by a person.
Example:
•
With no taxes, a person earns $50,000 per year.
•
The government imposes a $10,000 income tax.
•
The tax is collected from the worker.
•
In response to the tax, the employer gives the worker a $5,000 raise.
Who bears the statutory and economic burdens of the tax?
 Statutory burden is on the worker, but economic burden is shared
between the worker and the employer.
13
Statutory vs. Economic Tax Burden (or tax incidence)
Statutory tax burden is the amount of tax collected from a person.
Economic tax burden is the amount of tax paid by a person.
Example:
•
With no taxes, a person earns $50,000 per year.
•
The government imposes a $10,000 Social Security tax.
•
$5,000 of the tax is withheld from the worker’s pay check. The employer
is required to pay the other $5,000.
•
In response to the tax, the employer cuts the worker’s salary by $5,000.
Who bears the statutory and economic burdens of the tax?
 Statutory burden is shared by the worker and employer, but economic
burden is on the worker only.
14
Sales/Excise Tax
When the government imposes a tax, the price the consumer pays is
no longer the same as the price the producer receives.
Example: $10 per unit tax.
 The consumer pays $35 per unit, but the producer receives only
$25 per unit.
We call the $35 the “consumer price” or the “price including tax” and
the $25 the “producer price” or the “price excluding tax.”
15
Round 2: Statutory Tax Burden is on Consumers
In this round, consumers will pay an additional $5 per unit tax.
The price consumers pay is the price you charge (the producer price)
plus $5.
 The statutory tax burden is on the consumer.
16
Round 2
In this round,
consumers will
pay an
additional $5
per unit tax.
The consumer
price is the
price you
charge plus the
$5 tax.
If you charge,
$7, how many
units will
consumers buy?
77
What is your
profit?
Consumer Price
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
($7)(77) – ($1)(77) = $532
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Consumer Price
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
17
Round 2
Choose the
price you will
charge for your
product (the
price excluding
tax).
The consumer
price is the
price you
charge plus $5.
Every unit you
sell costs you
$1 to produce.
Consumer Price
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Consumer Price
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
18
Round 2
$18.00
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Round 1 (no tax)
Consumer Price
Round 2 (tax on consumer)
Producer Price
19
Round 2
Firms' Profits
$640
$620
$600
$580
$560
$540
$520
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19
20
Round 3: Statutory Tax Burden is on Producers
In this round, producers will pay a $5 per unit tax for every unit they
sell.
The price consumers pay is the price you charge.
 The statutory tax burden is on the producer.
21
Round 3
In this round,
producers will
pay a $5 per
unit tax.
Your cost per
unit is now $6
($1 per unit to
produce plus $5
per unit tax).
If you charge,
$7, how many
units will
consumers buy?
101
What is your
profit?
Consumer Price
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
($7)(101) – ($6)(77) = $245
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Consumer Price
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
22
Round 3
Choose the
price you will
charge for your
product.
The consumer
price is the
price you
charge.
Every unit you
sell costs you
$6.
Consumer Price
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Consumer Price
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
23
Round 3
$18.00
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Round 2 (tax on consumer)
Consumer Price
Round 3 (tax on producer)
Producer Price
24
Round 3
$5.00
$4.50
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Round 2 (tax on consumer)
Consumer Tax Burden (per unit)
Round 3 (tax on producer)
Producer Tax Burden (per unit)
25
Round 3
Firms' Profits
$640
$620
$600
$580
$560
$540
$520
$500
1
2
3
4
5
6
7
8
9
10
11
12 13
14
15
16
17 18
19
26
Luxury versus Necessity
Consumption of luxury goods is more sensitive to price changes.
Consumption of necessity goods is less sensitive to price changes.
Example:
•
At a price of $10 per ticket, Howie will see 10 movies per year.
•
If the price rises to $12, Howie will cut back to 5 movies per year.
 20% rise in price results in a 50% reduction in consumption
 Howie’s consumption is highly sensitive to price changes.
 For Howie, movies are a luxury good.
27
Luxury versus Necessity
Consumption of luxury goods is more sensitive to price changes.
Consumption of necessity goods is less sensitive to price changes.
Example:
•
At a price of $10 per ticket, Rob will see 10 movies per year.
•
If the price rises to $12, Rob will cut back to 9 movies per year.
 20% rise in price results in a 10% reduction in consumption
 Rob’s consumption is less sensitive to price changes.
 For Rob, movies are a necessity good.
28
Round 4
Choose the
price you will
charge for your
product.
The consumer
price is the
price you
charge.
Every unit you
sell costs you
$6.
Consumer Price
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
397
394
390
387
383
379
375
371
367
363
358
353
348
343
338
333
327
322
316
310
304
298
291
285
278
271
264
257
250
243
Consumer Price
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
235
227
219
211
203
195
186
178
169
160
151
142
132
123
113
103
93
83
73
63
52
41
30
19
8
0
0
0
0
0
29
Round 4
$18.00
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Round 3 (necessity good)
Consumer Price
Round 4 (luxury good)
Producer Price
30
Round 4
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
Round 3 (necessity good)
Round 4 (luxury good)
($1.00)
Consumer Tax Burden (per unit)
Producer Tax Burden (per unit)
31
Round 4
Firms' Profits
$2,360
$2,340
$2,320
$2,300
$2,280
$2,260
$2,240
$2,220
$2,200
$2,180
$2,160
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19
32
How to increase tax revenue
In an attempt to increase tax revenue, the government increases the
tax from $5 per unit to $15 per unit.
33
Round 5
Choose the
price you will
charge for your
product.
The consumer
price is the
price you
charge.
Every unit you
sell costs you
$16.
Consumer Price
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
397
394
390
387
383
379
375
371
367
363
358
353
348
343
338
333
327
322
316
310
304
298
291
285
278
271
264
257
250
243
Consumer Price
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
235
227
219
211
203
195
186
178
169
160
151
142
132
123
113
103
93
83
73
63
52
41
30
19
8
0
0
0
0
0
34
Round 5
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
Round 4 ($5 tax)
Consumer Price
Round 5 ($15 tax)
Producer Price
35
Round 5
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Round 4 ($5 tax)
Round 5 ($15 tax)
($2.00)
Consumer Tax Burden (per unit)
Producer Tax Burden (per unit)
36
Round 5
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Round 4 ($5 tax)
Total Tax Revenue
Round 5 ($15 tax)
37
Round 5
Firms' Profits
$800
$700
$600
$500
$400
$300
$200
$100
$0
1
2
3
4
5
6
7
8
9
10
11 12
13 14
15 16
17
18 19
38
How to increase tax revenue
In an attempt to increase tax revenue even further, the government
increases the tax from $15 per unit to $25 per unit.
39
Round 6
Choose the
price you will
charge for your
product.
The consumer
price is the
price you
charge.
Every unit you
sell costs you
$26.
Consumer Price
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
397
394
390
387
383
379
375
371
367
363
358
353
348
343
338
333
327
322
316
310
304
298
291
285
278
271
264
257
250
243
Consumer Price
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
235
227
219
211
203
195
186
178
169
160
151
142
132
123
113
103
93
83
73
63
52
41
30
19
8
0
0
0
0
0
40
Round 6
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
Round 5 ($15 tax)
Round 6 ($25 tax)
($5.00)
Consumer Price
Producer Price
41
Round 6
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
Round 5 ($15 tax)
Consumer Tax Burden (per unit)
Round 6 ($25 tax)
Producer Tax Burden (per unit)
42
Round 6
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Round 4 ($5 tax)
Round 5 ($15 tax)
Total Tax Revenue
Round 6 ($25 tax)
43
Round 6
Firms' Profits
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0
1
2
3
4
5
6
7
8
9
10 11
12 13 14
15 16
17 18 19
44
Does it work this way in the real world?
45
Who bears the economic burden of the
Social Security tax?
46
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Growth in Median Real Gross Wages (2 year rolling average)
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Source: Social Security Administration and the U.S. Bureau of Labor Statistics.
47
Growth in Median Real Gross Wages (2 year rolling average)
6%
5%
Average annual wage growth when SS tax increases = 1.0%
Average annual wage growth when SS tax does not change = 1.3%
4%
3%
2%
1%
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
0%
-1%
-2%
-3%
-4%
Source: Social Security Administration and the U.S. Bureau of Labor Statistics.
48
Average annual wage growth when SS tax increases = 1.0%
Average annual wage growth when SS tax does not change = 1.3%
Increasing SS tax slows average wage growth by 0.3%.
When SS tax rate increases, it increases (on average) by 0.3%
Employer passes on employer’s half of SS tax
increases to the worker in the form of lower wages.
49
Does increasing Social Security tax
increase Social Security tax revenues?
50
18%
16%
14%
12%
10%
8%
6%
4%
2%
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
0%
OASDI-HI Marginal Tax Rate (right axis)
Source: U.S. Bureau of Labor Statistics.
51
10%
18%
9%
16%
8%
14%
7%
12%
6%
10%
5%
8%
4%
6%
3%
4%
2%
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
0%
1960
0%
1958
2%
1956
1%
Growth in OASDI-HI Real Tax Revenue per Capita (left axis, 5-year moving average)
OASDI-HI Marginal Tax Rate (right axis)
Source: U.S. Bureau of Labor Statistics.
52
Does increasing the capital gains tax rate
increase tax revenues?
53
40%
35%
30%
25%
20%
15%
10%
5%
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
0%
Capital Gains Tax Rate
Source: Gwartney, J.D. and R.G. Holcombe, 1997. Optimal Capital Gains Tax Policy. Report to the Joint Economic Committee
of the United States Congress.
54
$450
40%
$400
35%
$350
30%
$300
Billions 1992$
25%
$250
20%
$200
15%
$150
10%
$100
Capital Gains Tax Revenues (left axis)
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
0%
1976
$0
1975
5%
1974
$50
Capital Gains Tax Rate (right axis)
Source: Gwartney, J.D. and R.G. Holcombe, 1997. Optimal Capital Gains Tax Policy. Report to the Joint Economic Committee
of the United States Congress.
55
Two possible goals for tax policy:
1. Raise revenue.
2. Redistribute income.
56
Can we tax the rich by taxing things that
rich people buy?
57
1990 Deficit Reduction Law: The “Luxury Tax”
Goal: Raise tax revenue by raising taxes on “the rich.”
Means: 10% excise tax on recreational planes.
Result: 80 fewer planes sold
$130 million lost sales
480 lost jobs
Estimated tax revenue: $6 million.
Actual tax revenue:
$530,000.
 Economic burden of the tax fell almost entirely on “the poor.”
 Government gained $1,100 for every job a worker lost.
Source: Joint Committee on Taxation, “Methodology and Issues in the Revenue Estimating Proecess” (JCX-2-95),
January 23, 1995.
58
Can we get more money from the rich by
taxing their income at a higher rate?
59
In early 1920’s, the top income tax rate
was decreased from 73% to 24%.
60
Top Income Tax Rate Cut from 73% to 24% in Early 1920’s
61
In early 1960’s, the top income tax rate
was decreased from 90% to 70%.
62
Top Income Tax Rate Cut from 90% to 70% in Early 1960’s
63
In early 1980’s, the top income tax rate
was decreased from 50% to 28%.
Lower bracket income taxes were also
decreased.
64
Top Income Tax Rate Cut from 50% to 28% in Early 1980’s
65
What to do?
The rich are getting richer while the poor
are getting poorer.
66
Income Distribution for 1980 (in 2003$)
20%
18%
14%
12%
10%
8%
6%
4%
2%
> $100,000
$75,000 $100,000
$50,000 $75,000
$35,000 $50,000
$25,000 $35,000
$15,000 $25,000
0%
< $15,000
% of Households
16%
1980
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673.
67
Income Distribution for 2003 (in 2003$)
20%
18%
14%
12%
10%
8%
6%
4%
2%
1980
> $100,000
$75,000 $100,000
$50,000 $75,000
$35,000 $50,000
$25,000 $35,000
$15,000 $25,000
0%
< $15,000
% of Households
16%
2003
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673.
68
100%
90%
In 1980, the lower 80% of households
earned 56% of all income.
% of Total Income
80%
70%
60%
By 2003, the lower 80% of households
earned only 50% of all income.
50%
40%
30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of the Popuation
1980
2003
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2008, Table 675.
69
In which world would each person rather live?
Person 1
Person 2
Person 3
Person 4
Person 5
Person 6
Person 7
Person 8
Person 9
Person 10
Household Income in World #1
$32,000
$33,500
$35,000
$36,500
$38,000
$39,500
$41,000
$42,500
$44,000
$45,500
Household Income in World #2
$40,000
$41,875
$43,750
$45,625
$47,500
$49,375
$51,250
$53,125
$77,000
$79,625
In world #1, Person 10 earns 11% of all income.
In world #2, Person 10 earns 15% of all income.
(prices are the same in the two worlds)
70
100%
In World #1, the lower 80% of
households earned 80% of all income.
90%
% of Total Income
80%
In World #2, the lower 80% of households
earned only 70% of all income.
70%
60%
50%
40%
30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of the Popuation
World #1
World #2
71
In which world would each person rather live?
Person 1
Person 2
Person 3
Person 4
Person 5
Person 6
Person 7
Person 8
Person 9
Person 10
Household Income in World #1
$32,000
$33,500
$35,000
$36,500
$38,000
$39,500
$41,000
$42,500
$44,000
$45,500
Household Income in World #2
$40,000
$41,875
$43,750
$45,625
$47,500
$49,375
$51,250
$53,125
$77,000
$79,625
Household Income in World #3
$6,400
$6,700
$7,000
$7,300
$7,600
$7,900
$8,200
$8,500
$8,800
$9,100
World #3’s income distribution is the same as World #1’s.
(prices are the same in the two worlds)
72
73
Impact of a Change in the Estate Tax on Firms With 0-4 Employees
116,000
114,000
Number of Firms
112,000
110,000
108,000
106,000
104,000
102,000
100,000
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year
No Change in Estate Tax
Estate Tax per Decedent Doubles
74
Impact of a Change in the Estate Tax on Firms With 10-19 Employees
116,000
114,000
Number of Firms
112,000
110,000
108,000
106,000
104,000
102,000
100,000
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year
No Change in Estate Tax
Estate Tax per Decedent Doubles
75
Impact of a Change in the Estate Tax on Firms With 500+ Employees
116,000
114,000
Number of Firms
112,000
110,000
108,000
106,000
104,000
102,000
100,000
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year
No Change in Estate Tax
Estate Tax per Decedent Doubles
76
Expected Tax and Benefits for Median Worker
$60,000
$50,000
$40,000
$30,000
$20,000
Expected annual Social Security tax payments
$10,000
100
97
94
91
88
85
82
79
73
76
70
67
64
61
58
55
52
46
49
43
40
37
34
31
28
25
22
$0
($10,000)
Expected annual Social Security benefits
($20,000)
($30,000)
Compiled from data published in 2003 Statistical Abstract of the United States, U.S. Bureau of the Census, and provided by the Social Security Administration
77
77
$320,000
$270,000
Expected annual benefits from privatized account
This chart assumes that 100% of the
worker’s current Social Security taxes are
diverted to a private investment account
yielding an 8% annual return.
$220,000
$170,000
$120,000
$70,000
Expected annual Social Security tax payments
77
73
69
65
61
57
53
49
45
41
37
33
29
25
21
17
13
9
5
1
$20,000
($30,000)
Compiled from data published in 2003 Statistical Abstract of the United States, U.S. Bureau of the Census, and provided by the Social Security Administration
78
78