Chapter 20 - Taxation and the public budget. In this chapter you will learn: What the major public policy goals of taxation are? How deadweight loss and administrative costs contribute to the inefficiency of a tax? How taxes effect business revenue? What differences exist between proportional, progressive, and regressive taxes?...
Trang 1© 2014 by McGraw-Hill Education
Chapter 20
Taxation and the Public Budget
2
© 2014 by McGraw-Hill Education
contribute to the inefficiency of a tax
progressive, and regressive taxes
States
exists between revenues and expenditures
What will you learn in this chapter?
3
© 2014 by McGraw-Hill Education
Price
Quantity
S
D 1
Why tax?
Tax
1 Raises revenue…
Price paid by
consumers
Price received
by sellers
2 …and changes behavior.
D 2
• As a tax is levied on consumers, the demand curve shifts
downby the amount
of the tax
the government
• Changes behavior of buyers and sellers
Trang 2© 2014 by McGraw-Hill Education
Deadweight loss is
surplus lost due to the reduced quantity.
Each tax considered must compare trade-offs
between revenue and inefficiency
Principles of taxation
0
10
20
30
40
50
60
70
80
90
100
Price ($)
Quantity of jeans (millions of pairs)
D1
S
2 …which moves equilibrium
to a lower quantity.
D2
3
1 Tax creates a new
demand curve $20 below… • Taxes cause changes in
behavior and a deadweight loss to occur
– A $20 tax on jeans shifts the demand curve downward.
–Deadweight lossis the loss
of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity.
– Inefficiency is loss in total surplus.
5
© 2014 by McGraw-Hill Education
price elasticity of supply and demand.
Principles of taxation
DWL = $80 DWL = $40 DWL = $60
Deadweight loss (DWL)
D1
D2
S Original demand
Quantity
Price
50
D1
D2 More elastic demand
Quantity
Price
50
30
D1
D2
S
Less elastic demand
Quantity
Price
50
0
$20
62
42
26
$20
54
34
22
$20
58
38
24
6
© 2014 by McGraw-Hill Education
activities that people will continue to engage
minimize deadweight loss.
amount to each taxpayer regardless of their
economic behavior or circumstances.
–Highly efficient
–People do not find it fair
–Size of the tax is limited by the poorest citizens’
ability to pay
Principles of taxation
Trang 3© 2014 by McGraw-Hill Education
implementing a tax.
–Resource costs for government agencies(such as
the IRS) and for taxpayers (in the form of lawyers
and filling out forms)
administrative burden will be.
Principles of taxation
8
© 2014 by McGraw-Hill Education
Tax effects
• There are two opposing effects when a tax increases:
• The tax revenue raised is equal to:
Tax revenue = Tax per unit × Number of units sold
• The tax revenue calculation is an after-the-fact
analysis
• Taking the number of units sold without a tax and
multiplying by the tax rate is incorrect
9
© 2014 by McGraw-Hill Education
Tax effects
• Increase, as the government gets more revenue per units sold
• Decrease, as fewer units are sold
• The net effect on revenue depends on whether the quantity effect outweighs the price effect
Price effect
+ = Revenue before tax increase
= Revenue after tax increase
+
As the tax rate increases, revenue will:
T 1 Tax rate increases …
Quantity effect
2 … and quantity decreases
Tax rate (%)
Quantity (millions)
T
0
10
20
30
40
50
60
70
80
90
100
2 4 6 8 10 12 14 16 18 20
Trang 4© 2014 by McGraw-Hill Education
Diminishing returns to revenue
• As the tax rate increases from 0, the price effect dominates the quantity effect and revenue rises.
• After the maximum, the tax rate
is so high that the quantity effect dominates the price effect and revenue falls.
• The revenue-maximizing tax rate depends on the elasticity of supply and demand:
– The more inelastic supply and demand are, the larger the tax rate required to reach the revenue-maximizing point is.
• This curve is sometimes referred
to as the Laffer curve
Tax rate
Up to a point,
Increasing the tax
rate increases
total revenue.
Past that point,
increasing the tax
rate decreases
total revenue.
X%
Given these two opposing effects, there is a maximum
11
© 2014 by McGraw-Hill Education
• Policy-makers and taxpayers are concerned not only with
what a tax does, but also with who pays it
– The statutory incidence tells who is legally obligated to pay the
tax to the government.
– The economic incidence tells who loses surplus as a result of the
tax.
– The statutory incidence has no effect on the economic incidence.
• The side of the market that is more price-inelastic bears
more of the tax burden
• Policy-makers can levy a tax, but have little power in
shifting the tax burden between buyers and sellers
Incidence: Who ultimately pays the tax?
12
© 2014 by McGraw-Hill Education
For each of the following goods, identify whether
the tax burden would mostly fall on buyers or
sellers.
Active Learning: Who pays the tax?
1 Mountain bikes with an elasticity of
supply of 1.32 and an elasticity of
demand of -3.5
2 Cigarettes with an elasticity of supply of
2.5 and an elasticity of demand of -.24
3 Soft drinks with an elasticity of supply of
1 and an elasticity of demand of -2.5
Trang 5© 2014 by McGraw-Hill Education
Policy-makers can affect the relative economic incidence of a tax
Incidence: Who ultimately pays the tax?
Progressive
Rate
20%
30%
Regressive
Rate
65%
6.5%
Amount
$5K
$50K
Amount
$4K
$60K
Amount
$13K
Proportional
Rate
25%
$20k $200k
Proportional/flat tax
• Same tax rate.
• Differing amounts of taxes paid.
Progressive tax
• Low-income pay lower rate than high-income.
• High-income pay more taxes.
• Low-income pay less taxes.
Regressive tax
• Low-income pay higher rate than high-income.
• High-income pay less taxes.
• Low-income pay more taxes.
Must weigh positive judgments about the efficiency of the proposed tax and
normative judgments about the “fairness” of its incidence.
14
© 2014 by McGraw-Hill Education
revenue.
sources:
A taxonomy of taxes
15
© 2014 by McGraw-Hill Education
The rate of taxation between taxes differs over time
A taxonomy of taxes
3
0
6
9
12
15
18
21
2012*
0.5%
1%
2.3%
6.2%
8.5%
% of GDP
Personal income taxes
Payroll taxes Corporation income
taxes
Trang 6© 2014 by McGraw-Hill Education
individuals and corporations
income
–If actual earnings are less than expected earnings,
individuals receive a tax refund
–If actual earnings are greater than expected earnings,
individuals must pay the difference to the government
–Higher income earners pay taxes at higher rates
–Defined by income tax “bracket.”
A taxonomy of taxes
17
© 2014 by McGraw-Hill Education
marginal tax rate.
–Individuals pay different amounts of taxes on each
bracket of income earned
the means to calculate one’s tax bill.
A taxonomy of taxes
Single Tax Bracket ($) Marginal Tax Rate (%)
18
© 2014 by McGraw-Hill Education
Suppose an individual earned $40,000 in 2010
Active Learning: Calculating tax bills
Single Tax Bracket ($) Marginal Tax Rate (%)
Trang 7© 2014 by McGraw-Hill Education
incomes by their sources, except for capital
• The capital gains tax is applicable on all income
earned/lost by buying and selling of investments
estate
A taxonomy of taxes
20
© 2014 by McGraw-Hill Education
on wages (and not other sources of income).
–Charged in equal parts to employees and
employers
–Pays for current Social Security and Medicare
benefits
rate and only on wages
A taxonomy of taxes
21
© 2014 by McGraw-Hill Education
being the corporate income tax
service being purchased
–Major source of revenue for state governments
–No U.S federal sales tax
of a home or other property
–Local tax authorities assess property values every few
years and levy a fraction of the value as the tax
Corporate income tax and other taxes
Trang 8© 2014 by McGraw-Hill Education
For each of the following scenarios, identify the type
of tax that must be paid
1 John buys two houses when house values are low
and sells them when values rise
2 While on vacation, Sarah buys gum and pays an
additional 8% in taxes
3 Camille pays her local tax authority 2% of the value of
her home
Active Learning: Distinguishing types of taxes
23
© 2014 by McGraw-Hill Education
• The tax revenue received by the government is included
with other sources of revenue to finance government
spending
• Comparing tax revenue as a percent of GDP provides
one way to compare taxes across countries
The public budget
% of GDP
Country (world ranking)
13%
14%
16%
25%
34%
41%
45%
57%
65%
Pakistan (201)
United States (184)
Uganda (195)
Argentina (126)
Japan (78)
United Kingdom (44)
Germany (30)
Norway (13)
Cuba (6)
• Low-income countries tend to collect
less in taxes as a percentage of GDP
• High-income countries tend to collect more.
• The U.S is an extreme exception.
24
© 2014 by McGraw-Hill Education
• The relationship between public revenues and public
spending is messy
revenue, nor particular taxes
• Spending can be categorized by whether Congressional
approval is required
• Includes spending on the military, public construction and road
building, and scientific and medical research.
individuals with a certain characteristic or factor
• Age, income, and disability are examples of characteristics.
• Social Security, Medicare, and welfare programs are the vast
majority of federal expenditures.
The public budget
Trang 9© 2014 by McGraw-Hill Education
U.S budget shifts in response to national events
The public budget
% of budget
0
10
20
30
40
50
60
70
80
90
100
1940 1950 1960 1970 1980 1990 2000 2010
Function
3.1 Education and social services
Other 2.7
Veterans
% of Budget
(2012)
Net interest 9.1
Income security 15.0
National 18.2 Social Security 20.5 Health expenditures 23.4
4.7 Physical resources
• During World War II, defense was priority.
• In recent years, health and social security spending has increased.
26
© 2014 by McGraw-Hill Education
• In many years, governments spend more than they bring in.
– Causes a budget deficit, and the difference between spending
and revenue must be financed by issuing debt.
– A budget surplus occurs when spending is less than revenue.
• Commonly calculated as a percentage of national GDP.
• The U.S has sustained more deficits than surpluses in recent years
The public budget
Billions of $
Fiscal year
Recession period
-149.7
-412.7
-1,412.7 236.2
-1,600
-1,200
-800
-400
0
200
1980 1984 1988 1992 1996 2000 2004 2008 2012
Surpluses and deficits in recent U.S history
• The debt is equal to the sum of all annual budget deficits and surpluses.
• It can be difficult to balance
a public budget every year.
• Many economists suggest balancing the budget over the business cycle.
27
© 2014 by McGraw-Hill Education
Presently, the revenue stream for Social Security
is greater than the outlays paid in benefits.
The future of social security
% of GDP
Year
Outlays
Revenue
0
1
2
3
5
6
1990 2000 2010 2020 2030 2040 2050 2060
Deficit Surplus
The future of Social Security
several more decades
Trang 10© 2014 by McGraw-Hill Education
public revenue; it is also used to changes the
behavior of market participants
efficiency and tax incidence
taxation:
–Deadweight loss is the reduction in total surplus that
results when the number of trades that occur
decreases due to the tax
–Administrative burden includes the time and money
spent by the government, as well as by individuals
Summary
29
© 2014 by McGraw-Hill Education
quantity effect
taxes reduces total revenue
paying a tax
–A proportional tax charges all taxpayers the same
percentage of income
–A progressive tax charges low-income earners a
smaller percentage of their income than high-income
earners
–A regressive tax charges low-income earners a larger
percentage of their income than high-income earners
Summary
30
© 2014 by McGraw-Hill Education
comes from personal income and payroll taxes;
a significant minority comes from corporate
income taxes.
government revenue.
spending.
spending, a budget deficit occurs.
Summary