Question
A new 1% tax has been proposed on the provision of medical services. A debate has developed about whether the tax should be paid by
A new 1% tax has been proposed on the provision of medical services. A debate has developed about whether the tax should be paid by medical service providers as a portion of monthly patient fee revenues, or by consumers at the point of service. The amount of the tax would be the same in either case. Describe how these two alternatives compare in terms of the economic incidence of the tax. Which of the following statements is the LEAST correct?
a. | The point of service tax will cause consumers to pay more than the service provider tax because medical services are a necessity. | |
b. | If the tax is remitted by service providers, they will pay more and consumers will pay more. | |
c. | The two alternatives are identical in terms of the economic incidence of the tax because the side of the market that is taxed does not affect where the burden lands. | |
d. | The providers and patients will split the tax equally because the economic incidence of the tax depends on the relative price elasticities of supply and demand, not on the legal incidence of the tax. |
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