Taxes IV: The Price Isn't Right | Cash Course: Economics | PragerU Kids

Before we start this episode, here's a quick preview of what's coming. Ready to take charge of your finances and master the art of money management? Cash Course is your ultimate guide to financial literacy from personal budgeting to macroeconomics. Check out more episodes at prageru.com. Whether it's a sales tax uh or a property tax or a income tax uh nobody enjoys paying taxes. Taxes have also led to serious [music] conflicts throughout history. In 1765, when England imposed the infamous [music] Stamp Act, the American colonies revolted. That began a series of events that led to the American Revolution and eventually [music] independence in the colonies. A new country, the United States, created a system of government that gave its citizens a say in taxes they paid. Taxes would be minimal and would fund just the bare [music] essentials of government. This new tax system started small, but like most things government [music] related, it grew bigger and more complicated over time. In 2024, the average American [music] taxpayer paid over $17,000 in annual income taxes. Gross. Whether they want to or not, everyone [music] pays taxes of some kind. Some of this money goes to necessary public goods like roads and sewer systems [music] or the country's military. Social welfare programs, government subsidies, foreign aid, and transfer payments are also funded by taxes. [music] And the results are, well, questionable. $2 million to teach farmers in South America how to play violin. Gross. >> Not again. >> But how do taxes affect a market economy? Well, they [music] distort the price of goods and services. A price distortion is an inaccurate picture of how much it costs to make or sell a product or how much someone pays for it. Price distortions move producers and consumers away from equilibrium, the sweet spot where the product's supply is equal to the amount demanded. Let's consider sales tax, [music] which is an amount added to a product or goods price. If a dining set costs $100 and the sales [music] tax is 5%, the final price is $105. Or if a pair of concert tickets cost $400 and [music] the sales tax is 10%, then the final price is $440, but the cost of taxes is more than the higher price. If the consumers pay the higher price, it may appear to the organizers that the event is more profitable. [music] However, that higher price can discourage consumers from buying tickets, leading to fewer sales overall. This creates a gap between the market price and the true value of the concert tickets. This gap is the price distortion and it can result in lost revenues, reduced attendance, or even canceled events. >> That's whack. >> Distorting potential profit could lead to the concert not happening at all, which is a loss for everyone involved. If [music] higher taxes lead producers to make less or consumers to buy less of something, the result [music] is dead weight loss. This is a reduction in the total benefit to both the producer and consumer. So [music] if the venue has 100 concert seats to sell and 100 people want to buy those seats, the market would be at equilibrium. If the prices increase due to the taxes and only 90 seats are sold, the value of the unsold seats is the dead weight loss. The people wanted the seats and the venue wanted to sell them. But because of the tax, no one received the benefit of those 10 tickets. [music] It is simply wasted. >> Direct. Now consider property tax, which is an amount added to the value of a home or building and usually collected by local government. [music] If a home's value is $100,000 and the annual property tax is 2%, the owner is on the hook for $2,000 a year in taxes. The higher the property value, the higher the tax liability. A property tax also causes a price distortion because anyone who buys or sells a property has to consider the extra cost. This could affect both the housing supply and the demand for housing in the surrounding area, making it harder for people to sell their homes or for new buyers to acquire the new property they want. Whether it's sales tax, property tax, or any other tax, who ends up paying the majority of the tax isn't always who is initially charged. If a tax is originally levied on a business, that business can pass on the increased cost to the consumer through increased [music] prices. But how much they can pass on must be carefully considered in order to avoid raising the price so much that they lose [music] customers. This is especially true with goods and services where people are more sensitive to price. Here, the producer will often shoulder more of the tax burden. This leads to higher costs for the business and potentially less supply. Wait, what about income taxes? Income taxes also greatly impact the economy, but that's a whole other episode. GROSS. >> [screaming] >> THAT'S THE THIRD TIME THIS EPISODE. >> Taxes distort the true cost of goods and services, pushing prices away from equilibrium, creating dead weight loss and wasting resources. In an efficient economy, people and businesses would make decisions based less on taxes and more on the price of a good instead. So, the next time you hear taxes, ask yourself, what's the cost and who's really paying? I like that. That was >> Watch more at pragerukids.com. And parents, don't forget to subscribe.