Who Pays the Tax?

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Louisiana imposes a tax on junk food. For the tax to actually deter people from eating junk food, should junk food demand be elastic or inelastic?

• Elastic

• Inelastic

If the Louisiana government wants to strongly discourage people from eating junk food, when will it need to set a higher tax rate: When junk food demand is elastic or when it is inelastic?

• Elastic

• Inelastic

Let’s take a look at the supply side of junk food. If junk food supply is highly elastic—perhaps because it’s not that hard to start selling salads with low-fat dressing instead of mayonnaise- and cheese-laden burgers—will a junk food tax have a bigger effect if supply were inelastic or elastic?

• Elastic

• Inelastic

If a government is hoping that a small tax can actually discourage a lot of junk food purchases, it should hope for:

• Elastic supply and inelastic demand

• Elastic supply and elastic demand

• Inelastic supply and elastic demand

• Inelastic supply and inelastic demand

What does it mean that elasticity equals escape? (This is worth remembering: Elasticity is one of the toughest ideas for most economics students

• People with elastic demands don’t like to pay taxes

• It is easy for market participants to escape to another market if they have elastic demand or supply

• Resources used to produce goods with elastic supply cannot be used for much else

One way governments have tried to collect taxes from the wealthy is through the use of luxury taxes, which are exactly what they sound like: taxes on goods that are considered luxuries, like jewelry or expensive cars and real estate. What is true about the demand for luxuries?

• It is elastic

• It is inelastic

• It is unit elastic

Consider jewelry. Is a luxury tax more likely to hurt the buyers of jewelry, or the sellers of jewelry?

• The Buyers

• The Sellers

Let’s apply the economics of taxation to romantic relationships. Sometimes relationships have taxes. Suppose that you and your boyfriend or girlfriend live one hour apart. Using the tools developed in the chapter, how can you predict which one of you will do most of the driving? That is, which one of you will bear the majority of the relationship tax?

• The person with more inelastic demand for the relationship will bear the tax – he or she will do most of the driving.

• The person with more elastic demand for the relationship will bear the tax – he or she will do most of the driving.

In the opening scene of the classic Eddie Murphy comedy Beverly Hills Cop, Axel Foley, a Detroit police officer, is stopping a cigarette smuggling ring. Of course, smugglers don’t pay the tax when the cigarettes cross state lines. Which way do you suspect the smugglers were moving the cigarettes, based on economic theory?

• From the high-tax North to the low-cost South.

• From the low-cost South to the high-tax North.

In our discussion of taxation, we’ve acted as if it were effortless to pass and enforce tax laws. But, of course, law enforcement officials including the Internal Revenue Service put a lot of effort into enforcing tax laws. Let’s think for a moment about what kind of taxes are easiest to collect, just based on the basic ideas we’ve covered. Who will make the most effort to escape a tax?

• The party who is elastic

• The party who is inelastic

• Neither party