Principles of Tax Policy Efficiency minimize excess burden low compliance costs easy to administer Equity normative in nature

Benefit Principle People who benefit from government expenditures should pay Views a tax as a price paid for government supplied good Appealing on equity grounds

Efficiency and Benefit Principle Can minimize excess burden of taxation Features of a user charge Can act as a rationing device

Actual Taxes and Benefit Principle Share some characteristics of benefit principle Example: Property taxes and education

Ability-to-Pay Principle Individuals should pay taxes in proportion to ability to pay Can apportion tax burden for activities undertaken for the public good Redistribution programs

Implementing Ability to Pay Is it fair for someone to pay more because of greater ability to pay? When do people have same ability to pay? How much more should person with higher income pay?

Horizontal Equity People with equal ability to pay assessed same amount in taxes Example: Deductions for children Concept of equity may be at odds with benefit principle

Vertical Equity People with greater abilities to pay should pay more in taxes Does not specify how much more one should pay

Progressive, Proportional, and Regressive Taxes Proportional tax Percentage of taxpayers income Progressive tax Larger percentage of income as income rises Regressive tax Smaller percentage of income as income rises

Progressive, Proportional, and Regressive Taxes

Income and Consumption over Life Cycle

Sumptuary Taxes Designed to discourage consumption of taxed good Excess burden of taxation Possible rationale for sumptuary taxes: Corrective tax on an externality Legislating morality through tax system Used to raise revenue

Sin Taxes and Healthy Living [Insert Figure 11.3]

Politics and Tax Policy Special interests and taxation bias in tax policy to favor special interests over general public interests Federal versus state and local taxation special interests have greater influence on federal tax policy

Tax Reform Major overhaul recommended over piecemeal reform Can withstand negative influence of special interests More likely to simplify tax code

Tax Policy in Real World Equity and efficiency Individual taxes versus the tax system