econ 4300

lump sum tax

This tax is fixed in amount. It is a general tax that everyone would pay, not relative to any tax base. This type of tax is independent of income, consumption, wealth, or specific purchases, so there is no distortion of prices or behavior. This type of tax will make all consumers poorer, so they will reduce purchases of all items. This tax is the benchmark for measurement of the excess burden/effects of OTHER types of taxes because it is non-distortionary. This tax looks like a parallel inward shift in the budget line. There is NO substitution effect to this tax.

Taxes levied on exchange

These types of taxes are regressive and create a tax distortion. They drive a wedge between the price paid by buyers and that paid by the sellers. This causes the net price received by the sellers of a good or service to diverge from the gross price paid by buyers. The price of other goods is also affected.

Excess Burden

the deadweight loss that comes from a tax as some is taken from consumer surplus and some taken from producer surplus. size of this is dependent on magnitude of demand/supply elasticity

Tax Incidence

Who really receives the final burden of the tax? It is a function of relative elasticities

Forward shifting

This happens when the seller moves some of the tax to the buyer through higher prices

Backward Shifting

this happens when buyers force the seller to bear some of the price by reducing the price they are willing to pay for the quantity they demand

Individual excess burden of a tax

the loss in the well-being of the taxpayer when they pay X amount in taxes under the price distorting tax instead of a lump sum tax, for example

Unit tax

This is a type of tax that is price-distorting. The tax is levied on a fixed amount per unit of a good exchanged in the market, therefore, tax is independent of changes in price.

If such a tax is levied on the sellers, the tax will just be added to the price as an additional variable cost and the supply curve will shift to the left.

Revenue collected from this tax by the government is the amount of the goods sold after the tax multiplied by the tax per unit.

The higher the unit tax, other things equal, the greater the annual reduction in the taxed good being sold.

Excess Burden of a Unit Tax

The impact of this on the unit tax is created by deadweight loss. It is an additional cost to society over and above the amount that citizens pay in a tax.

This measures the loss in net benefits from the private use of resources that results when a price-distorting tax prevents markets for taxed goods and services from attaining efficient output levels

Elasticity and the unit tax

With accordance to this tax, if elasticity is negative, the excess burden is negative. If elasticities are low, the excess burden will be small. If elasticities are large, the excess burden will be large.

Perfect Elastic supply means that when prices are raised, the buyer pays the tax, so it is forward shifting.

If the elasticities of supply and demand are different, more burden will fall on the economic actor with a lower elasticity. The more elastic the supply of a taxed good, the greater the portion of the tax will be borne by the buyers.

When supply is more elastic than demand, the incidence of the tax falls more heavily on consumers than on producers

When the demand is more elastic than the supply, the incidence of the tax falls more heavily on producers than on consumers

If the elasticity is zero, then the excess burden will be zero. If demand elasticity is zero, the buyer pays 100% of the tax burden. If supply elasticity is zero, the seller pays the tax burden.

In general, the more inelastic the supply of an item, the smaller the reduction in quantity sold after the tax and the smaller the excess burden. This makes sense because inelastic goods are necessities.

efficiency-loss ratio

This is the ratio of the excess burden to the total tax collected, a measure of how completely surplus is preserved, as it is converted into tax revenue. Lowest loss ratios will be achieved with products inelastically demanded and supplied, like gas, electric supply, and medical services. This ratio can be used to find out which taxes will have the least negative effects and excess burdens

Substitution of goods

The less the opportunity or willingness to substitute other goods and services for those that are taxed, the less is the distortion introduced into the economy with respect to resource allocation. In efficiency grounds, the best taxes are those levied on goods that have few substitutes in either production or consumption

Ad Valorem

This is a tax assessed on a percentage of the good's price. Examples include sales tax on retail items, social security, and Medicare taxes on wages.

The tax revenue increases as the price increases. The higher the price of the taxed good, the greater the amount of the tax

Excess burden rises as the price of the good increases. Absolute and relative elasticities impact total excess burden and relative incidence.

These types of taxes are less efficient than other because it changes the slope and position of the demand curve.

Payroll tax

This is an ad valorem tax because it is levied as a percentage of wages paid by employers. It is used to finance Social Security pensions and Medicare. It is a two-bracket regressive tax structure

Monopolies

Competitive firms shift along the demand curve, while these types of firms shift along the marginal revenue curve. The excess burden is lower. A unit excise tax on output produced by this firm increases marginal cost at each level of output by an amount equal to the unit tax

Minimizing Excess Burden

This depends on elasticity, so broadly based taxes, like sales or excise taxes, must have different rates if this is to happen. In other words, goods must be taxed at different rates rather than uniform rates to accomplish this.

Tax rates would be highest on necessities, as they are the easiest and most efficient to tax/but bad for the poor, and lowest on luxuries

Could exacerbate the tendency of these taxes to be regressive and could make them not politically efficacious

Sales Tax

These are a bad way to raise revenue because they are regressive in terms of income or wealth. They are not regressive in terms of their own base, which is consumption.

Taxation

compulsory payments associated with certain activities. Revenues are used to purchase inputs needed for government supplied goods and services and to redistribute to targeted groups

Tax Base

activity or item on which tax is levied, such as income, consumption, wealth. Values depend on economic decisions made by individuals

Total Annual Income

in a nation this is equal to the value of total consumption and savig of all people and organizations in the country

Total Consumption

annual income less the amount saved

wealth

accumulated savings and investments at a point in time. Includes three components: real property (land and improvements to the land owned by households), tangible property (cars, clothing, jewerly), and intangible property (stocks, bonds, and other paper assets).

General Tax

taxes all of the components of an economic base, with no exclusions, exemptions, or deductions from the tax base

Selective Tax

only certain portion of tax base are assessed, or some escape due to exemptions and deductions

Excise Tax

assessed on manufacture or sale of a particular good or service

Average Tax Rate

is the total taxes divided by value of tax base

Marginal tax rate

is the change in total taxes paid and the change in value of the tax base

Flat Tax

always the same percentage. Sales tax, gas, Medicare charges the same percentage. Also called a proportional rate structure. The average tax rate is independent of the size of the base. Average and marginal rates are the same. Additional earnings are taxed at the same rate as that applied to previous values

Progressive Tax

With this type of tax, the ATR increases with the size of the tax base. For example, the more money you make the more you are taxed. The larger the tax base, the larger the MTR applied. The MTR will eventually exceed the ATR.

MTR is more influential in determining distortion/behavior changes.

Under a progressive tax rate structure, the ATR increases with the size of the tax base. The MTR exceeds the ATR after a point

Rates are applied to the tax brackets, for example, if you make $25k, the first $4k is not taxed because there is no tax rate on that first tax bracket of $4k

Tax bracket

gives the increment of annual income associated with each MTR

Regressive tax rate

pay no more when you max out. The ATR declines as the size of the tax base increases. Results in lower ATR as income rises. More productive individuals are rewarded with lower tax rates.

Horizontal taxes

taxed the same at the same level of income, but does not work in practicality because of tax preferences

vertical taxes

higher income, higher tax rate

Benefits Principle

This states that taxes should be linked to benefits received by the government, resulting in a Lindahl scheme as long as there are no free riders. It is difficult to link public goods provision to benefits received for many goods. Those who favor this approach think that fees and charges are ideal forms of government finance.

Price distributes the costs of goods and services among those who consume them. If successfully implemented, it links the cost per unit of government services to the marginal benefits.

Earmarked taxes

These are taxes that have been labeled for a particular use. Special taxes are designed to finance specific government-supplied services. One example is gasoline taxes financing infrastructure.

Ability to pay

taxes should be distributed according to capacity to pay, either based on earnings or based on wealth. Gov may seek for horizontal or vertical equity

Those with greater ability to earn will be taxed accordingly

Distributing tax shares is seen as independent of individual marginal benefits received from government activities

Requires some sort of collective agreements about equitable distribution of taxes among citizens

Horizontal Equity

when individuals of the same economic capacity pay the same amount of taxes per year

(both concepts are subjective and are difficult to administer. Income does not equal wealth when regarding the ability to pay taxes. Two may have the same salary, but one was inherited a house and has no debts, the other renting and has debts. Different ability to pay)

Vertical Equity

when individuals of differing economic ability pay annual taxes that differ according to some collectively chosen notion of fairness.

(both concepts are subjective and are difficult to administer. Income does not equal wealth when regarding the ability to pay taxes. Two may have the same salary, but one was inherited a house and has no debts, the other renting and has debts. Different ability to pay)

tax evasion

illegal

tax avoidance

legal through tax preferences

double taxation

when businesses have to pay taxes on profits as well as paying taxes on dividends to their shareholders, the double tax is when corporations and the owners pay both corporate and income taxes

revenue options (not taxes)

raise revenue by selling bonds, bonds are valued by many type of investors, you pay back interest payments over a longer period of time

Debt Finance and deficit

Borriwng has distributional implications that generate transfers of wealth and income

Deficits normally respond counter-cyclically

When economic growth/employment is positive the deficit grows

Borrowing postpones burden of taxation

Deficit may increase interest rates and crowd out private investment

Us debt is more than 100% of GDP

Foreigners own a third of the debt

Treasury debt creates reserves and credit, but it increase inflation

More money floating around the economy

Loading debt leads to less taxes in the present, but crashes and recession in the future

General obligation bonds = backed by the taxing power of the government that issues the securities

Revenue bonds = backed by the promise of revenue to be earned on the facility being financed by the bonds, typically used for financing roads, bridges, and ither facilities that would generate revenue

There is a bias towards debt finance in corporations because dividends cannot be deducted from a corporation's income, but interest can

Equity Finance

Tax system punishes equity finance and encourages debt finance

High Inflation

May try to engineer higher inflation so that the debt is worse less, this may not work

If inflation rate exceeds nominal interest rates then savers take their money out of the banking system

Bankers are unable to lend money

Contracts not signed

Created by spending more than it raises in taxes, gov borrowing from itself by creating money

Any increase to the money supply to finance government expenditures results in inflation

Inflation finance is an attempt to move outside of the production-possibility curve

User fees

Direct charges for consumption on particular items 'licesnses or franchises, tolls, assessments on private property

Prices are determined through political means rather than market interaction

Only works when it is possible to exclude someone unless they pay the fee

Cause those who directly use the service to take some burden of the cost to provide it

Government Enterprise

gov distributes and finances liquor agencies, lotteries, postal service

Must price their output to cover costs in a collectively agreed upon manner

Income Distribution

Gini coefficient is based on wealth, earned income, disposable income, and consumption and it helps us measure income distribution

The gini coefficient creates a lorenze curve

Degree of curvature is proportional to the inequality of the income distribution

Perfect equality would be represented by a straight line

Can also be use to depict wealth inequalities

Calculated by all the area between the curve and the line and the area under the line

If all income is equally divided then g=0