Chapter 17: Public Choice Theory and the Economics of Taxation

Public choice theory

Economic analysis of government decision making, politics, and elections

Logrolling

Trading of votes to secure favorable outcomes

Paradox of voting

A situation in which society may not be able to rank its preferences consistently through paired-choice majority voting

Median-voter model

Under majority rule and consistent voting preferences, the median voter will in a sense determine the outcomes of elections

Government failure

Inefficiency due to certain characteristics of the public sector

Special-interest effect

Any outcome of the political process whereby a small number of people obtain a government program or policy that gives them large gains at the expense of a much greater number of persons who individually suffer small losses

Earmarks

Narrow, specifically designated authorizations of expenditure

Rent seeking

Appeal to government for special benefits at taxpayers’ or someone else’s expense

Benefits-received principle

Households and businesses should purchase the goods and services of government in the same way they buy other commodities

Ability-to-pay principle

Tax burden should be apportioned according to taxpayers’ income and wealth

Progressive tax

If its average rate increases as income increases. Such a tax claims not only a larger absolute (dollar) amount but also a larger percentage of income as income increases.

Regressive tax

If its average rate declines as income increases. Such a tax takes a smaller proportion of income as income increases. A regressive tax may or may not take a larger absolute amount of income as income increases.

Proportional tax

If its average rate remains the same regardless of the size of income

Tax incidence

Final resting place of a tax (who pays it?)

Efficiency loss of the tax

This loss is society’s sacrifice of net benefit, because the tax reduces production and consumption of the product below their levels of economic efficiency, where marginal benefit and marginal cost are equal