Economists and state legislators disagree about who pays a sales tax, the business ringing up the sale or the shopper handing over the cash.  Economists think that, if the legislators increase a sales tax rate, then the burden of the tax can fall on either party, depending on the nature of the market for the good being sold.

Model Link:  Who Pays a Sales Tax?
<activate the model links>
Printable PDF Exercises

The EconModel analysis of this issue has the following steps:

• Draw the Diagram

Draw and explain the demand curve, the supply curve, and the supply curve plus tax.

• Find the Equilibrium

Explain why the equilibrium quantity is where the demand curve intersects with the supply curve plus tax.

• Who Pays a Sales Tax?

Show that sales tax is effectively split between the supplier and the purchaser. 

Something to Think About
Nominally, the employer and employee each pay one-half of the Social Security taxes associated with an employee.  Who really pays Social Security taxes?  Would it change the effective burden of a 6% sales tax if it were divided into two 3% taxes, one "paid by the purchaser" and one "paid by the merchant"?

• Analyze the Slopes

Show that the split of the tax between the supplier and the purchaser depends on the slopes of the demand and supply curves.

• Revenue Maximizing Tax

Find the tax rate that maximizes tax revenues.

• The Laffer Curve

Show that tax revenues can actually increase when tax rates are cut.

Classic Economic Models

    Contents

Microeconomics

Introduction
    Overview of Micro Models

Supply and Demand
    Basic Supply and Demand
    Who Pays a Sales Tax?
    The Cobweb Model and
        Inventory-Based Pricing

Theory of the Firm
    Perfect Competition
    Monopoly and
        Monopolistic Competition
    Price Discrimination
    The Demand for Labor

Theory of the Consumer
    Two Goods - Two Prices
    Intertemporal Substitution
    Labor Supply, Income Taxes,
        and Transfer Payments

Macroeconomics

Introduction
    Overview of Macro Models

Models in Chronological Order
    The Classical Model
    The Simple Keynesian Model
    The Keynesian IS/LM Model
    The Mundell-Fleming Model
    Real Business Cycles
    The IS/MP Model
    The Solow Growth Model

Financial Markets
    Utility-Based Valuation of Risk
    Mean-Variance Analysis:
        Risk vs. Expected Return
    Fixed Income Securities:
        Mortgage/Bond Calculator
    Growth Investments:
        Present Value Calculator

Resources