Taxes and Subsidies

ECON 101H: Introduction to Economics

Sérgio O. Parreiras

Economics Department, UNC at Chapel Hill

Spring 2026

Unit Tax (Excise Tax)

Definition: Unit Tax
A unit tax (or excise tax) is a fixed dollar amount levied on each unit of a good sold, regardless of its price.

For example, the federal cigarette tax is $\$1.01$ per pack whether you're buying premium or budget cigarettes. Similarly, gasoline taxes are charged per gallon—the same tax applies whether gas costs $\$2.50$ or $\$4.00$ per gallon.

Compare: Ad Valorem Tax
This contrasts with an ad valorem tax, which is a percentage of the good's price. A 7% sales tax, for instance, collects more revenue on a $\$50$ item than a $\$20$ item. With a unit tax, the tax burden is identical across price points—a $\$5$ bottle of wine and a $\$50$ bottle of wine face the same per-gallon excise tax in NC.

The Tax Wedge

A per-unit tax of $t$ is collected on each unit sold. It doesn't matter whether the government collects from buyers or sellers—the economic outcome is the same.

The Tax Wedge
Let $P_B$ = price paid by buyers and $P_S$ = price received by sellers.
With a tax of $t$ per unit: $$P_B = P_S + t$$ (what buyers pay) = (what sellers get) + (tax)

The tax creates a "wedge" of size $t$ between the two prices. Buyers face a higher price, sellers receive a lower price, and the difference goes to the government.

Seller-Remitted Taxes
More common, easier to enforce:
Sales tax — added at checkout, remitted by retailer
Excise taxes — on gasoline, alcohol, tobacco
VAT (almost any country but USA) — collected at each production stage
Buyer-Remitted Taxes
Less common, harder to enforce:
Use tax — on aircraft, boats, business equipment bought out-of-state
Customs duties — paid by importer
Private vehicle sales — buyer pays at DMV (NC Highway Use Tax)
No Taxes Equilibrium t = 0 P Q 200 20 D S S 60 110 90 t 130 90 70 t 150 110 90
Equilibrium without Taxes t = 0 P Q 200 160 20 S D D 110 90 t 110 70 90

Equilibrium with a Tax

Equilibrium Conditions
In equilibrium, three conditions must hold simultaneously:
  1. Buyers are on their demand curve: $Q = D(P_B)$
  2. Sellers are on their supply curve: $Q = S(P_S)$
  3. The tax wedge holds: $P_B = P_S + t$

So we solve: $D(P_B) = S(P_S)$ and $P_B = P_S + t$

Or equivalently: $D(P_S + t) = S(P_S)$

This determines the new equilibrium quantity $Q^*$ and both prices $P_B$ and $P_S$.

Dead Weight Loss = 0 t = 0 t = 0
Producer Surplus 4050 4050
Consumer Surplus 4050 4050
Tax Revenue 0 0
Social Surplus 8100 8100
$t = 0$
$P_B = 110$
$P_S = 110$
Welfare Analysis PB Q 200 20 D S S 110 110 90

Donald Trump's Rose Garden Address

April 2nd, 2025

"If imposing tariffs and protective barriers made nations poorer, then every country on earth would be racing to eliminate these policies and China would be the first in line. They run a very strong country, but they're not first in line. And the American people are paying a very big price. From 1789 to 1913, we were a tariff-backed nation, and the United States was proportionately the wealthiest it has ever been.

So wealthy, in fact, that in the 1880s, they established a commission to decide what they were going to do with the vast sums of money they were collecting. We were collecting so much money so fast we didn't know what to do with it. Isn't that a nice problem to have? What do you think, Marco? Good problem?

Marco would love that problem. But we don't have that problem anymore, but we're not going to have it very much longer, I will tell you. But they collected so much money, they actually formed a commission to determine what they were going to do with the money, who they were going to give it to and how much.

Then in 1913, for reasons unknown to mankind, they established the income tax so that citizens, rather than foreign countries, would start paying the money necessary to run our government."

$P_B = 130$
$P_S = 90$
Tax Incidence Pass-through: 50.00% P Q D S S 110 70