Final answer:
Differential tax incidence measures the effects of tax rates on different income levels, assessing how tax codes impact income distribution and the disposable income of consumers.
Step-by-step explanation:
The concept of differential tax incidence measures the effect that changes in tax rates have on different groups within the economy. The correct answer to the student's question is 1) Tax rates on different income levels. Differential tax incidence typically relates to the impact of taxes on income distribution and how tax policies can create different effects across various income brackets.
To elaborate, when the tax code changes, it can alter the distribution of income by affecting marginal tax rates differently across income levels. For example, if marginal tax rates increase with income, then higher-income households will pay a larger fraction of their income in taxes compared to those with lower incomes, leading to a more equal distribution of income after taxes. The effect of these changes on the consumers' disposable income is direct as it influences their spending power. Therefore, understanding the elasticity of demand and supply is crucial for predicting which group will bear the larger portion of the tax burden.
Differential tax incidence measures the effect of tax rates on different income levels. It analyzes how the burden of a tax is divided between consumers and producers. The tax burden generally falls on both consumers and producers, but it is influenced by the elasticity of demand and supply. In cases where demand is inelastic, the tax burden is primarily borne by consumers in the form of higher prices.