Question

8. Show either graphically or through a mathematical argument the differ- ence in the effects from a profit tax verses a revenue tax on the amount of outputs/inputs the firm uses.

Answer 1

Profit tax

• Profit tax or the Corporate tax, economists suggest is the most harmful type of tax and that workers bear a portion of the burden. Empirical studies show that labor bears between 50 and 100 percent of the burden of the corporate income tax. Reducing the corporate income tax will benefit workers as new investments boost productivity and lead to wage growth. If lawmakers raised the corporate income tax rate from 21 percent to 25 percent, we estimate the tax increase would shrink the long-run size of the economy by 0.87 percent, or $228 billion. This would reduce the capital stock by 2.11 percent, wages by 0.74 percent, and lead to 175,700 fewer full time equivalent jobs.
• Lower corporate tax rate drives growth in capital stock, wages, jobs, and the overall size of the economy. When firms think about making an investment in a new capital good, like a piece of equipment, they add up all the costs of doing so, including taxes, and weigh those costs against the expected revenue the capital will generate. The higher the tax, the higher the cost of capital, the less capital that can be created and employed. So, a higher corporate income tax rate reduces the long-run capital stock and reduces the long-run size of the economy.

Revenue tax:

Sales tax is the business tax levied on business revenue. The impact of this on the firm is also depended on elasticity, which is explained below

Pc 0 Tax Pp revenue Tax revenue Qt Qe Qt Qe Quantity Quantity (b) Elastic supply and inelastic demand (a) Elastic demand and inelastic supply

If demand is more inelastic than supply, consumers bear most of the tax burden. But, if supply is more inelastic than demand, sellers bear most of the tax burden. When the demand is inelastic, consumers are not very responsive to price changes, and the quantity demanded remains relatively constant when the tax is introduced. When a tax is introduced in a market with an inelastic supply—such as, for example, beachfront hotels—sellers have no choice but to accept lower prices for their business.