You are given the following information on a proposed cigar tax in the Republic of Panatela. Panatela
Question:
You are given the following information on a proposed “cigar tax” in the Republic of Panatela. Panatela collects no other specific excise taxes, and all other government revenues come from a neutral lump-sum tax. (A lump-sum tax is a tax of a fixed sum paid by all people regardless of their circumstances.) Assume further that the burden of the tax is fully borne by consumers. Now consider the following data:
• Cigars consumed before the tax: 18 million
• Cigars consumed after the tax: 14 million
• Average price per cigar: $20 (not including the tax)
• Tax rate: 25 percent
Estimate the size of the excess burden of the tax. What is the excess burden as a percentage of revenues collected from the tax?
Step by Step Answer:
Mylab Economics With Pearson Access Code For Principles Of Microeconomics
ISBN: 9780135197141,9780135197103
13th Edition
Authors: Karl E. Case; Ray C. Fair; Sharon E. Oster