Sources of Government Revenue Chapter 9

Economic Impact of Taxes Resource Allocation –Higher taxes = lower supply Increases the price of the product –People buy less Businesses sell less, people lose jobs Behavior Adjustment –Taxes can be used to alter behaviors Sin tax – designed to stop consumption of socially undesired products Productivity and Growth –If taxed too high, people lose incentive to work –Businesses will be less likely to expand when taxes increase

Criteria for Taxes Taxes must meet three criteria to be effective: 1. Equity –People want fair taxes, difficult to do Tax loopholes – give advantages to some 2. Simplicity –Easy for tax payer and collector to understand 3. Efficiency –Easy to administer –Successful as a revenue generator Look at how tax is collected Create enough revenue to outweigh costs of tax

Two Principles of Taxation Determines which groups will be taxed Benefit Principle –Those who benefit from government services should pay for them –People should pay for the percentage of the service received Ex. of gas taxes –Two limitations Government provides services to those who cannot afford to repay them Benefits are hard to measure

Two Principles of Taxation Ability-to-Pay Principle –People should be taxed based on their ability to pay –Based on two factors Recognizes societies cannot always recognize benefits of government spending Assumes people who make more can afford to pay more taxes

Types of Taxes Proportional Tax –Same percentage of tax Social Security Tax Progressive Tax –Higher percentage on people with high incomes income tax Regressive Tax –Higher rate of taxation for lower incomes –Ex. Sales Tax