Section 1 Economic Impact of Taxes (cont.) Taxes and other governmental revenues influence the economy by affecting –Resource allocation –Behavior adjustment Sin tax Know examples of sin taxes

Section 1 Economic Impact of Taxes (cont.) –Productivity and growth –Determining incidence of a taxincidence of a tax –Understand how “incidence of a tax” works and how the burden of the tax can be shifted to the consumer depending on the nature (elasticity) of the product. Shifting the Incidence of a Tax

Figure 1

Section 1 Criteria for Effective Taxes (cont.) Taxes must meet 3 criteria: –Equity—impartial and just: Makes sense to avoid tax loopholestax loopholes –Simplicity—tax laws written so taxpayers and collectors can understand them –Efficiency—easy to administer and successful in generating revenue

Section 1 United States taxes are based on two principles –Benefit principle of taxationBenefit principle of taxation Two Principles of Taxation (cont.) Limitations to the benefit principle of taxation Those who receive government services are least likely to afford them. Benefits are hard to measure and impact others.

Section 1 –Ability-to-pay principle of taxationAbility-to-pay principle of taxation We can’t always measure benefits derived from government spending. Assumes individuals taxed more suffer less discomfort paying taxes Two Principles of Taxation (cont.)

Section 1 Three general types of taxes exist in the United States today. –Proportional taxProportional tax Three Types of Taxes (cont.) If the percentage tax rate is constant, the average tax rate is constant. average tax rate Medicare tax fundMedicare Three Types of Taxes

Section 1 –Progressive taxProgressive tax Marginal tax rate Three Types of Taxes (cont.) –Regressive taxRegressive tax Profiles in Economics: Monica Garcia Pleiman

Figure 2

Types of Taxes All taxes in the United States can be broken down into three categories: proportional, progressive, and regressive VS 1