economic aspects of taxation

8/3/2019 Economic Aspects of Taxation

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Economic Aspects of Taxation

Ch 16


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Principles of Taxation

the benefits approach

and the ability-to-pay approach.

The underlying question here is, whoshould pay, and who should pay the

largest amount.


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benefits approach

we would tax people in proportion to the

benefit they receive from government

pr

ogr

ams. This may work

well for

thingslike state parks orhighways.

those who use the parks might pay a

largershare of theirupkeep


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the ability-to-pay approach

we would tax people in proportion to their

income orwealth.

The higher the income orwealth, the higher the

taxes.

Some individuals would be paying forprograms

and services that they would neverneed to take

advantage of. the notion of fairness involves redistribution of

resources within the system.


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issues of fairness

the notions ofhorizontaland verticalequity

Horizontal equityimplies that people who

are viewed as equal should he taxed

equally. Vertical equityrelates to the tax treatment

of people with different levels of income.


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Progressive, proportional and

reg

ressive tax

Taxes areprogressive if they take larger

proportions of higher incomes and

regressive if they tak

e smallerpor

tions ofhigher incomes.


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Progressive, Proportional, and

Regressive Taxes

Chapter 16

Figure 16-4


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Chapter 16

Table 16-4


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Direct vs. indirect tax

direct(levied directly upon individuals orfirms)

indirect(levied on goods and services, andhence only indirectly on individuals orfirms who consume those goods and

services).

example of a direct tax is the personalincome tax; an example of an indirect taxis a gasoline tax.


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Federal Taxation

The federal government raises most of its

revenue from individual and corporate

income taxes.

Other federal taxes include sales and

excise taxes, payroll taxes, and corporate

profits taxes.

.


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Sales and excise

Taxes

Sales and excise taxes are levied as a

percentage of sales orperunit of an item

purchased;

these are controversial because they appear tobe regressive.

Because poorerpeople tend to spend larger

por

tions of their

income on consumption goods,they tend to pay a largerportion of their income

as sales taxes.


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corporate profits taxes;

Corporations must pay corporate profits

taxes;

these are controversial in the sense thatthey provide disincentives forcorporate

investment.


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Payroll taxes

Payroll taxes are collected to pay forsocialinsurance programs. So its proportional.

Payroll tax generally refers to two kinds of

taxes: Taxes which employers are required towithhold from employees' pay, also known aswithholding, Pay-As-You-Earn (PAYE) orPay-

As-You-Go (PAYG) tax;

or taxes directly related to employing a workerpaid from the employer's own funds (privatedriver, maid: these may be either fixed chargesorproportionally linked to an employee's pay.


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Chapter 16

Table 16-3


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Local governments( state, town, city)

Local governments employ property taxes most

heavily.

In fact, approximately 30 percent of the total

revenues of state and local government areraised through property taxes.

(Henry George would he pleased to hear this!)

States rely on sales taxes and, in some cases,income taxes.


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States and Localities Rely on

Transfers and Indirect Taxes

Chapter 16

Figure 16-6


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an efficient use ofresources?

Taxes have incentive effects and hence

alter the behaviorof market agents.

example, higher

income taxrateseffectively lowerwage rates forworkers.

substitution effects, and income effects.

Exemptions in the taxrate exist fo

rhomemortgage interest, giving people an

incentive to invest in housing markets.


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Response of Work to Taxes Depends on

Shape of Supply Curve

Chapter 16

Figure 16-7


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History of Top Marginal Tax Rate

in the United States

Chapter 16

Figure 16-5


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which goods and services can be taxed

most efficiently

The Ramsey tax rule states that the

government should levy the heaviest taxes

on those inputs and outputs that are most

price-inelastic in supply ordemand.

This will result in the smallestchange in

quantity exchanged across the market and

will generate the greatestamount ofrevenue for the government


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Efficiency vs. fairness

However, remember that the types of

goods that tend to have the most inelastic

demands are necessities;

increasing taxes on food, fuel, water, etc.

might be worrisome on the grounds of

equity.


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The thorny problem of tax

incidence

Questions of incidence ask who pays specific

taxes in the form of decreased purchasing

power.

They are related to questions about the degreeto which various taxes create disincentives for

people to work harderand/orsave more.

The benefit of transfers programs tends to offset

regressive treatment of low-income taxpayers.


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Who Pays the Taxes and

Who Benefits from Transfers?

Chapter 16

Figure 16-8


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The LafferCurve

Chapter 16

Figure 16-9


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Chapter 16

Table 16-2


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Chapter 16

Table 16-5

economic aspects of taxation

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