Intuitive Explanation of Who Pays the Tax

Non-intuitive explanation

When a tax is levied against a transaction, both parties to the transaction end up bearing some of the burden of the tax. Whether the buyer or the seller pays more of the tax depends on who has the greater elasticity.

Intuitive explanation

If I want to buy a new boat, but the government just put a new luxury tax on boats, will the boat dealer be able to pass the tax along to me or will he be forced to eat the tax? It depends on who wants to do the deal the most. Of course the seller will do his best to pass the tax on to me, but if he’s desperate to sell boats, and so are his competitors who are also trying to sell me a boat, then he’ll lower his price to get me to buy – effectively eating the tax himself.

It doesn’t matter who officially pays the tax. For example, officially I pay my income tax. But in a tight labor market (when there are lots of jobs and companies are having a hard time finding enough employees), my employer might be the one who is effectively paying the tax. Let’s say that I’m working for a company during a time when employers are desperate to hire people, and the government increases the income tax. My current employer doesn’t automatically raise my salary to compensate me for the increased taxes, so he’s effectively forcing me to eat the tax. However, if another company offers me a position doing the same kind of work for more money, then I can either take the new job, or try to extract a raise out of my current employer. In that kind of market I can effectively force the cost of the tax onto either my old employer or my new employer, because they need me worse than I need them.

Intuitive Explanation of Comparative Advantage

I'm going to try to come up with intuitive explanations for as many important concepts that voters should know about as possible. Maybe you can help me? Here's one:

Comparative Advantage

Non-intuitive explanation

International trade provides big gains to countries by letting them specialize in what they do best. Imagine there are two countries and that they both need paper products and circuit boards. If one country is better at making paper products and the other is better at making circuit boards, then each country should specialize in the product that they are best at producing, and then trade. However, if one country is better than the other at making both paper products AND circuit boards, does that mean that the country with the advantage in both kinds of production should make both kinds of products, and not trade with the other country? No! The country with an advantage in both products should specialize in the higher value product, and then trade with the other country for the lower value product. That way, the country isn't wasting valuable resources making a low-value product when they could be using those resources to make a high-value product. This will actually benefit BOTH countries. Both countries will have more paper products and more circuit boards to consume than if they don't trade.

Intuitive explanation

A successful cosmetic surgeon wants to redesign her kitchen. Not only is she a top surgeon, commanding in excess of $200/hour (on average, with different rates for different services), but she is also a highly skilled interior designer. In fact, she can produce designs that are as good as what her local professional interior designer can do, and she can do it in less time than he can. He charges $75/hr, and it will take him 8 hours to produce a design for her kitchen. She can produce a design of similar quality in 4 hours. The surgeon is very devoted to her family, and is unwilling to use her spare time in a way that takes her away from them, so if she re-designed her kitchen herself, she'd have to take time off work to do it. Should she create the design herself, or pay the professional designer to do it?

If she does the work herself, she will lose $800 worth of time at her practice as a surgeon (4 hours creating the design multiplied by $200 per hour). If she hires the professional designer she will pay him $600 (8 hours creating the design multiplied by $75 per hour). Therefore, she should hire the professional designer and save $200. This option is better for her (she saves $200), it's better for the designer (he gets a commision he wouldn't get otherwise), and it's better for her patients who need surgery (she will be able to serve more patients).

Make the World Easier to Understand

I think Bryan Caplan has a great idea here: Find intuitive explanations of complicated or technical concepts, so that more people can understand them. After all, you may enjoy feeling superior to your uneducated neighbors, but as voters they are setting policy for the community you live in.

Here's an example from the comments on Bryan's blog (my rephrasing):

Technical concept - Raising the minimum wage will increase unemployment for minimum wage earners.

Intuitive explanation - If I like bananas, but the government says that the grocery store has to charge $3 per banana, then I'm going to buy fewer bananas.Similarly, if I'm McDonald's and I want to hire cashiers, but the government says I have to pay them $20/hour, then I'm not going to hire as many cashiers (or open as many restaurants because they won't be as profitable).

I bet YOU can improve on this example.