Wednesday, July 27, 2011

Accidental airline tax holiday and Tax Incidence

NY Times article on how an accidental Tax Holiday created by a deadlocked Congress for airlines is entirely absorbed by the airlines. A nice illustration of one of the fundamental principles of public finance on tax incidence, that is the person who is levied the tax is not the one who pays for the tax. You hear evidence of this misunderstanding a lot when people say we should tax oil companies.

Typically its the party with less flexible (elasticity) that bears the burden. In airlines, in the short term, passengers are locked into their travel and firms are not competitive (no flat supply curve) so it makes sense that consumers bear most of the burden.

No comments: