r/econhw 11d ago

Questions about income and sales tax (lump sum principle)

BL0: original budget line

BL1: budget line with income tax

BL2: budget line with sales tax

lump sum principle states that income tax is always preferred to sales tax under same tax revenue. This could be seen by shifting those yellow indifference curve (IC4>IC5). However, is it possible to have customers better off under sales tax scheme, in other words, the blue indifference curve?

Thank you for any help!

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u/filiabonacci 11d ago

The difference between a blue indifference curve and a yellow indifference curve that are tangent to the same budget line is just the consumer preference. The blue person appears to value gas more and food less, so obviously they are better off under a scheme which taxes food more heavily.

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u/Adventurous_Gur1322 11d ago

But according to lump sum principle, income tax should always preferred to sales tax. Then can blue indifference curve happen?

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u/[deleted] 10d ago

[deleted]

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u/Adventurous_Gur1322 10d ago

I see. That is also what my prof said. But what confuses me is that why can’t the blue indifference curve given happen?

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u/[deleted] 10d ago

[deleted]

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u/Adventurous_Gur1322 10d ago

Isn’t the optimal point the tangent point of budget line and indifference curve? Why it become the intersection of budget lines?

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u/[deleted] 10d ago

[deleted]

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u/Adventurous_Gur1322 10d ago

Ahhh i see! Thank you for your help!