Question

Reason(s) sales tax is efficient or inefficient (focus: comparing deadweight loss, the efficient outcome of the competitive model, and loss of production to society).

Answer 1

Ans- A local or state tax imposed as a percentage of the selling price of goods or services payable by the customer. The tax is not recognized as the seller’s earnings, however the seller only collects the tax and transmits the same to local or state authorities. Sales tax is a form of regressive taxation that is the liability is based on the percentage of income consumed, which is higher for low income earners. As a result, individuals earning a relatively lower income will pay a higher proportion of income in the form of sales tax, defining the regressive nature of the tax.

The biggest advantage to sales taxes are how economically efficient they are in collecting a single dollar of revenue for the government that is, they have the smallest negative impact on the economy per dollar collected.

Taxes create deadweight loss because they prevent people from buying a product that costs more after taxing than it would before the tax was applied. Deadweight loss is the loss of something good economically that occurs because of the tax imposed. Tax on a product alone is not the only contributor to deadweight loss.

The pre-tax market price, i.e., the effective price that the seller gets to keep. This is to be compared to the market price in a world without sales tax.

The post-tax market price, i.e., the effective price that the buyer pays. This is obtained by adding the sales tax to the pre-tax market price. This is to be compared to the market price in a world without sales tax.

The equilibrium quantity traded. This is to be compared to the equilibrium quantity traded in a world without sales tax. This is an analytical study in perfect competition.