Tax Incidence: Who actually pays sales taxes

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Tax IncidenceWho actually pays sales taxes?
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Tax Incidence Economic Tax Burden

• Incidence of transaction costs
• Sales taxes
• Shipping costs
• Commission fees.

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Supply Demand Framework

• Two prices
• The after-tax price paid by the buyer
• The before-tax price received by the seller
• Tax incidence the difference between the prices
  paid/received and the price in the absence of the
  tax

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Elasticity of Demandand Shifting of Tax Incidence

• Demand for Delta airfares
• Many perfect substitutes
• Demand for Air travel
• Few imperfect substitutes
• Demand for Gasoline
• Generally no substitutes

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Examples

• Excise taxes on
• Gasoline
• Fall of 2005 GA
• Alcohol and Tobacco
• Export tariffs on natural resources
• Shipping costs
• eBay 2000 for every 1 increase in the shipping
  costs the price fell by0.55
• Real estate commissions

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Supply Elasticity and Tax Incidence

• The less flexible party pays the larger burden