Chapter 8: The Costs of Taxation

This chapter talks about how taxes help to raise revenue. Taxes raise prices for buyers and lowers the amount of money that sellers receive. The amount of tax collected by the government stays the same no matter whether it is levied on the producer or the consumer. When a tax is put on the buyers, the demand curves shifts down and when it is imposed on the producer, it shifts the supply curve. The chapter also talks about deadweight loss which is the fall in total surplus that results form a market distortion, such as a tax. The price elasticities of the supply and demand curves help measure the deadweight loss. In general, when one of the curves are relatively elastic, the deadweight loss of a tax is large. On the other hand, when one of the curves is relatively inelastic, the deadweight loss of a tax is small. Deadweight loss comes to be because a tax induces buyers and sellers to change their behavior. The chapter also talks about how labor is taxed, such as Social Security tax and Medicare tax.