Tax Incidence

The Australian government have suggested that they might need to increase GST to help fund the COVID-19 rescue package. GST is a tax on goods and services usually paid at the point of sale.

Consider the market for bread. Suppose a loaf costs $3.50 and includes a 50-cent tax per loaf.

2. If the government increases the tax to 60 cents per loaf, will the price for bread go up to $3.60? (2 marks)
3. What determines how the tax burden is shared between buyers and sellers? Explain (3 marks)
4. Suppose that at a price of $3.50 a thousand loaves are sold and when the tax is increased to 60 cents nine hundred loaves are sold. What was the total tax revenue for the government at the old tax rate and what is the tax revenue at the new rate? (2 marks)
5. Has the government revenue increased or decreased? What determines whether it goes up or down? Explain using the concept of elasticity. (4 marks)
6. Why would this tax be both socially inefficient and inegalitarian? Use the concepts of deadweight loss and wealth inequality. (4 marks)