The Burden of Taxes

The Burden of Taxes

by Amna, Kate, Selena, and Akhanda

Recently, Massachusetts enforced a new law requiring Amazon.com to include the 6.25% sales tax that Massachusetts customers already pay in offline stores. The goal behind this legislation is to level the playing field for merchants, whose customers are increasingly browsing in store while buying online. However, for college students, especially those of us without access to shopping malls or cars, Amazon becomes the only realistic option for buying things like beauty products, textbooks, and electronics. Therefore, college students' demand for Amazon products are considered inelastic.

Because students' demand for Amazon products is inelastic, this newly enforced sales tax in Massachusetts will not affect Amazon greatly. However, the burden of the tax will largely fall on the consumers, ie. poor college students. As a caveat, there are still other online stores, like Ebay, who are exempt. However, we are disregarding them for the purposes of this blog post due to the fact that they are considered less reliable than Amazon (with their Amazon Prime services) among college students.

By introducing the tax to Massachusetts Amazon shoppers, the government consequently introduced a deadweight loss (represented by areas B and D in the graph above). And because of that, we are Pareto inefficient, lowering consumer surplus and thereby leaving everybody less happy and well off than they could be. However, perhaps the silver lining in this situation is how this may level playing field for store owners with physical stores.

Similarly, college students, especially those who need to fly home, bear the burden of taxes when it comes to airfare. However, this burden will vary depending on the time of year. For example, students' demand for airfare during Spring Break is elastic relative to airfare for the Summer, which is inelastic. This is the case, because students do not necessarily need to fly home or fly to a vacation spot during Spring Break; they have the option to stay on campus, or with friends, or go on a (cheaper) road trip. For the summer, however, options are limited; it is more likely that students will have to fly home or fly to an internship location. This is especially true for international students.

Smart airlines who want to maximize profits would offer discounts specifically to students wishing to go to, say, Puerto Rico for vacation during Spring Break. Therefore, they would mostly absorb taxes in order to increase revenue. On the other hand, summer is the time when airlines "cash in" on students' inelastic demand for travel. Therefore, to our dismay, they largely shift the burden of taxes onto their consumers.

In the cases of Amazon.com and airlines, who bears the greater proportion of taxes differs depending on the elasticity of demand. All too often, sadly, it seems as if college students are always getting the short end of the stick.

Uncommon Grounds: Who bears the tax burden?

Uncommon Grounds: Who bears the tax burden?

Maria, Norma and Xiaotong

      Uncommon Grounds is Mount Holyoke’s College coffee bar run by the schools the Dining Services. Uncommon Grounds offers a small variety of products, which ranges from cappuccinos, espressos, lattes, mochas, as well as smoothies, milkshakes, malts, and other frozen ice cream drinks to freshly baked bagels, pastries and desserts. It is infamous for its fresh baked goods especially the great Chef Jeff Cookies. Uncommon grounds is committed to serving organic fair trade varietal coffees daily and supporting business around the pioneer valley area thus getting their products from local companies such as: Pierce Bros Coffee, located in Greenfield, Massachusetts,  "Bart's Homemade" Snow's ice cream, produced locally in Greenfield, Massachusetts and Mapleline Farms milk, produced locally in Hadley, Massachusetts.  Uncommon Grounds is also a source of student employment and in fact many students work at uncommon grounds.

      The fall and spring semesters are when students and most faculty is on campus. In this period the demand for the products sold by Uncommon Grounds is quite elastic and it is more elastic than the supply of goods. This is because these goods are non-essentials and students can easily decide to substitute them for other goods.  Most students have budget constraints and to them an increase in the price of coffee, cookies, cupcakes sold in uncommon grounds will probably lead to them consuming less in Uncommon Grounds and going to Rao’s or Thirsty Minds or maybe just decide that they shouldn’t be consuming these goods.

      On the contrary, during the summer there are not as many people on campus and most of them are not Mount Holyoke students or faculty and they are not here for a long period of time. During the summer the demand for these goods is more inelastic than the supply of these goods, consumers might not be very affected by price changes and also consumers do not have as many options to go to.

Uncommon Grounds products include a tax; both consumers and producers distribute this tax burden in this case. During the academic year the school mostly covers the tax burden of Uncommon Ground products because the demand is more elastic than the supply curve. Students are very sensitive to the price so Uncommon Grounds needs to pay more of the tax to keep the price low. However, during the summer, since higher price for the consumer will not reduce the amount of products purchased, Uncommon Ground will pass a greater part of the tax on to the consumers. They will bear most of the tax due to the inelasticity of the demand. Depicted in graph 2 and 3. For example a Chef Jeff chocolate chunk cookie is $1.25 during the school year and the tax is $0.25. The school covers $0.20 of the tax burden whereas the consumers only cover $0.05 of the tax during the summer the school only covers $0.05 of the tax burden and the consumers cover $0.20 of the tax burden.

http://thismatter.com/economics/tax-incidence.htm

Why are You Paying me Minimum Wage?

 Why are You Paying me Minimum Wage?A Look into the Intricacies of the Minimum Wageby Maniza, Linh-Lan, Geena and Sukanya 

With summer fast approaching, you may be starting to look for a job.  Maybe that’s even how you will be spending your spring break.  Most likely, a majority of the jobs that you will consider are going to be jobs that pay minimum wage (or if you work in the food industry, even less!).  Minimum wage is defined as the lowest wage permitted by law or by a special agreement (such as one with a labor union) that employers are required to pay their workers. The graph below illustrates the effects of a minimum wage:

http://blogs.yis.ac.jp/14webbk/files/2013/01/figur3-sm9t8k.gif

For you, a minimum wage probably appears to only have negative effects (less money and more hours working).  But, just like all things, there is a cost and benefit to having minimum wage at its current rate of $7.25 per hour.

Governments impose a minimum wage for a variety of reasons. Some of the immediate advantages of a minimum wage are an increase in the standard of living of workers, a reduction in poverty, and inequality in the social infrastructure.

However, there are also various disadvantages of a minimum wage too. Some of these include unemployment, formation of a black market, and cost-push inflation. A minimum wage can lead to cost-push inflation because firms face higher costs of production, which could be passed on to consumers in the form of higher prices. Therefore, while imposing a minimum wage, a government needs to weigh the costs and benefits and make a decision that maximizes the general welfare of the society.

The immediate problem associated with a minimum wage is a rise in unemployment. This is clearly demonstrated in the diagram above. “Lo” is the equilibrium quantity of labor in the market when the wage rate is “Wo”, i.e. before a minimum wage is imposed. However, when a minimum wage of “W1” is imposed, the quantity of labor demanded falls to “L2” since less firms are now willing to hire workers at the higher wage rate. On the other hand, the quantity of supply of labor rises to “L1” since more workers are now willing to work at the higher wage rate. This creates a surplus of labor equivalent to “L2 - L1”, which gives rise to unemployment in the workforce.

To fully understand the idea behind minimum wage, you first need to think about what labor actually is and how it is represented for workers and employers. The cost of labor (working) versus leisure (relaxing) may appear more complicated for you than when you look at the consumption of other goods.  But, it is actually quite logical.  Generally, when you hear that your wage will go up you want to work more to make more money.  This is especially true if you have a job that pays minimum wage.  But is this always true? Not necessarily.

Increasing a person’s wage to increase the amount of time that they spend working is only effective up until a certain point.  For example, if you are getting paid $7.25 an hour and your wage increases to $10, you will most likely want to work more hours.  As your wage goes up, you will want to substitute away from the relatively more expensive good (leisure).  At this point, the substitution effect is greater than the income effect.

But, after a point, a person’s wage becomes high enough that they feel comfortable working fewer hours.  For example, if your wage went from $7.25 to $50 per hour, you probably wouldn’t work as many yours.  At this point, the income effect is larger than the substitution effect.  The new wage is high enough to allow you to “consume” more leisure.

The graph that displays this concept is the backwards-bending labor supply curve pictured below.

http://en.wikipedia.org/wiki/File:Labour_supply.svg

With this idea that increase the wage might actually result in fewer hours worked, let’s talk about minimum wage specifically.  There is a potential danger in just increasing the wage for total hours worked because employees might not want to work as much if the income effect is greater than the substitution effect.  It’s not guaranteed that the worker will work more or less.

But, if an employer increases the wage for extra amount of hours worked, the worker will pick up some extra hours.  This is called overtime wage.  The reason that we know that the overtime wage will result in an increase in the amount of time spent working is because there will just be a substitution effect.  After you work your normal amount of hours, the original budget wage line will have a kink in it with the overtime wage having a steeper slope.  This prevents the income effect from taking place because your “new” budget line is conditioned you working at an amount on your original budget line.  This is why it may be more beneficial for companies to keep minimum wage and simply pay employees overtime.

Minimum wage is a government-mandated floor on the price of labor. The U.S. government has been holding it at $7.25/hour since July 2009, although President Obama has considered raising it. Since some people claim that receiving minimum wage doesn’t actually provide you with a liveable wage, various efforts have been carried out to find a solution.

On the one hand, an increased minimum wage enables workers to have a better standard of living, encouraging them to have better healthcare, better nutrition, and better education for the whole family. The White House states that a higher minimum wage can stimulate productivity while reducing strikes and that firms should not have difficulty adjusting to the new policy (Washington Post).  On the other hand, one possible outcome is that firms and companies might not want to hire as many workers, especially those at entry levels (who are mostly teenagers and recent graduates).

A limited workforce and competitive application pool are harbingers of increased an unemployment rate or the emergence of black markets, which consequently brings about other social and economical issues. One of the negative effects that a minimum wage has is the ability to increase the number of participants in the black market, in which goods and services are traded illegally. Whether the wage is set low or high, some individuals may be willing to work below minimum wage for the sake of employment. This is illegal, but the choice to work in the black market for some individuals seems rational, as it is more preferred to unemployment. The government, which sets the minimum wage price, may value certain work an X amount, but employers may value it for less, which is why they are willing to maintain a black market. An example of an underground economic activity would be a domestic cleaning aid who is an illegal immigrant. Having a cleaning lady (or man) itself is legal, but not if she (or he) works in the US illegally. However, the consumer may have a high enough demand for the service to not care about legality, and the cleaner demands employment enough to agree to enter the black market.

            This all seems so detailed when all you want to do is make some extra money over the summer.  But, it’s actually very important for people, especially for people without degrees, to understand the intricacies of the minimum wage. Although each and every government would want to ensure the highest profit and benefit for the people, it does not mean there should be the highest wage per hour for everyone. Instead, policy makers should be able to evaluate these effects and adjust minimum wage accordingly. So, next time you go for a job and hear that you will get minimum wage, think about everything that you now know about it, and decide what the best choice is for you.

Source used: http://www.washingtonpost.com/politics/obama-to-raise-minimum-wage-for-government-contract-workers/2014/01/27/f7994b34-87cd-11e3-916e-e01534b1e132_story.html

Elasticity of Demand and Decisions for Spring break

Elasticity of Demand and Decisions for Spring break

By Alice ,Congi ,Linda and Isha

Spring Break is just beyond the horizon! With a much-needed break in this cold, dreary semester, many of us yearn to go home for hot meals and hotter showers or to travel to someplace warm. With Mount Holyoke’s diverse campus full of people from all over the world, there are numerous factors in deciding how to spend this break--different income levels, different price tags, and thus endless possibilities of plans to be made.

Let us, look at two Students Joyce and Hannah. Joyce is an International student from Dubai where as Hannah is from California. They have the choice to either go home or go to Miami for spring break. During planning they would face problems like where to go? Which plane ticket to buy? How much money do they have?  So taking this as an example we will be discussing the elasticity of demand and how factors such as income and price affect it when Joyce and Hannah plan for spring break.

Factor 1: Income

First, let’s assume that Joyce and Hannah have the same preference which is traveling. For this example we will say that they choose to go to Miami. If we keep price constant and only look at the effects of income we will see shifts in demand as well. Lets look at how can their income affect their decision to buy plane tickets:

Both Hannah and Joyce have the same plane ticket price as $500 for Miami. Joyce had an income of $600 and now it increased to $1000. She could previously buy 1 ticket where as now she can afford to buy 2 tickets to Miami, perhaps one more for another vacation.

If we look at her Income Elasticity of demand we see:

IEoD= (%change in quantity)  = [      (2-1)/2     ]     =  1.5

            (%change in income)     [(1000-600)/600]

     Here we see that Joyce’s IEoD is more than zero. If the IEoD is more than zero it means the good they are buying is a normal good.

Factor 2 : Price change
         

        Now lets look at our case from another point of view. Airline companies are known to raise the airfare prices when vacations or holidays are near. Price is an important determinant to our students’ buying patterns. To only explore the effect of price we keep Joyce and Hannah’s purchasing power the same.   Both Hannah and Joyce think about going home. 

       

    If Joyce goes back home to Dubai, it will now cost her 1500 but the airfare for summer was $1000. At the previous price last year she bought 1 ticket to go home. Now she feels the price is too high and her consumption will be 0. With this information lets look at the PED in Joyce’s case:

Q1:1      Q2:0              P.E.D=  (ΔQ /Q)           = [   (0-1)/1      ]          = 2   [ P.E.D>1]

P1:1000  P2:1500                      (ΔP/P)                [(1500-1000) /1000]

Her Demand graph would looks like this:

From both the graph and example we see that the demand of plane tickets for international students like Joyce is very elastic. A change in price will affect the consumption highly. This is why the demand curve on Joyce’s graph looks almost flat. If the plane ticket prices had gone down, Joyce’s consumption would have risen greatly.  

        Looking at Hannah’s situation: a market for domestic college students buying plane tickets to go home. The airfare to go back to California is $300 during spring break, but at other times in the year it is $150. Last year when the price was $150 Hannah bought two tickets for two different weekends. Now for spring break she only buys 1 ticket. The PED here would be:

Q1:2      Q2:1              P.E.D=  (ΔQ /Q)       =      [   (2-1)/2      ]          = 1/2  [P.E.D<1 ]

P1:150   P2:300                           (ΔP/P)                [(300-150) /150]

The demand graph for Hannah would look like this:

 From both the graph and example we see that the demand of plane tickets for domestic students like Hannah is very inelastic. She can easily afford and will choose to go home. This is why the demand curve in Hannah’s graph looks almost vertical and a change in price will not greatly affect her consumption of plane tickets.

      Although the income and affordability affect the students in their decisions, price is also an important player. In the same market for plane tickets there can be various demands with different nature of price elasticity.

Therefore price and income changes greatly affect Joyce and Hannah's decision for spring break. Regardless of where they choose to go these two factors are key in their planning for Spring break. Using these factors Hannah, Joyce and other students in similar situations can analyze the elasticity of demand and how it is affected by the factors we discussed.