Economists and state legislators disagree about who pays a sales tax, the business ringing up the sale or the shopper handing over the cash. Economists think that, if the legislators increase a sales tax rate, then the burden of the tax can fall on either party, depending on the nature of the market for the good being sold.

**Model Link:
Who Pays a Sales Tax?**

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Printable PDF Exercises

The EconModel analysis of this issue has the following steps:

- Draw the Diagram

Draw and explain the demand curve, the supply curve, and the supply curve plus tax.

- Find the Equilibrium

Explain why the equilibrium quantity is where the demand curve intersects with the supply curve plus tax.

- Who Pays a Sales Tax?

Show that sales tax is effectively split between the supplier and the purchaser.

**Something to Think About**

Nominally, the employer and employee each pay one-half of the Social Security
taxes associated with an employee. Who really pays Social Security taxes?
Would it change the effective burden of a 6% sales tax if it were divided into
two 3% taxes, one "paid by the purchaser" and one "paid by the merchant"?

- Analyze the Slopes

Show that the split of the tax between the supplier and the purchaser depends on the slopes of the demand and supply curves.

- Revenue Maximizing Tax

Find the tax rate that maximizes tax revenues.

- The Laffer Curve

Show that tax revenues can actually increase when tax rates are cut.

**Classic
Economic Models**

**Microeconomics**

**Introduction**

Overview of Micro Models

**Supply and Demand**

Basic Supply and Demand

Who Pays a Sales Tax?

The Cobweb Model and

Inventory-Based Pricing

**Theory of the Firm**

Perfect Competition

Monopoly and

Monopolistic Competition

Price Discrimination

The Demand for Labor

**Theory of the Consumer**

Two Goods - Two Prices

Intertemporal Substitution

Labor Supply, Income Taxes,

and Transfer Payments

**Macroeconomics**

**Introduction**

Overview of Macro Models

**Models in Chronological Order**

The Classical Model

The Simple Keynesian Model

The Keynesian IS/LM Model

The Mundell-Fleming Model

Real Business Cycles

The IS/MP Model

The Solow Growth Model

**Financial Markets
**
Utility-Based Valuation of Risk

Mean-Variance Analysis:

Risk vs. Expected Return

Fixed Income Securities:

Mortgage/Bond Calculator

Growth Investments:

Present Value Calculator

**Resources**