Principles of Taxation

Gary KlassPos 232

Fairness?

• absolute equity – all benefit from government – all should pay equally(head tax)

• Ability to pay -- justification for progressive taxation (graduated income tax)

• Benefit principle -- tax in proportion to the benefit (gas tax, social secuirty)

Economic Neutrality --

Tax systems should exert minimal impact on the spending and business decisions of individuals and businesses.

Tradeoff: creating incentives for positive social behavior (“sin taxes”)

Efficiency and Simplicity

• Cost of collecting taxes(toll roads vs. IPass)

• Cost of compliance

Visibility

• Taxes should not be hidden – those who bear the burden should be aware

(Hidden taxes: Gross Receipts Tax, Lottery?)

Other principles

• Broad base (to allow lower rates)

• Predictable and stable supply of revenue

• Diverse sources (for stability and lower rates)

• Addresses geographic competition

Revenues

The Laffer Curve

TAX RATEO 100

Federal Government Outlays and Receipts (millions)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Outlays

Receipts

TAX RATES

Revenues and Expenditures