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.