The principles of taxation

Introduction to taxes w Poland: Excise duty Agricultural tax VAT PIT CIT Stock exchange tax Etc.

General info w Income tax not until 1840s w VAT starting from 1970s w First taxes: Road tolls Customs duties (tithe) Gathering places (marketplaces)

Set of rules w Progressive taxes reflect the principle of ability to pay. w Vertical and horizontal equity w The benefits principle is that people getting most benefit from public spending should pay most for it. ConflictConflict

How it is done w Transfer payments Money for the poor (pensions, supplementary benefit…) w Public goods available to anyone (even for those not paying taxes)

Drawbacks w Regressive elements Beer, tobacco - huge earners for the government Yet, the poor spend the highest proportion of their income on them

Tax incidence w (please draw Your attention to the black (white) board

New terms w Tax incidence is the final tax burden once we allow for all induced effects of tax w The tax wedge is the gap between the price paid by the buyer and the price received by the seller

Final word w The more inelastic the supply curve and the more elastic the demand curve, the more the final incidence will fall on the seller rather than the purchaser.

Must taxes distort? w Government needs tax revenue to pay for public goods and make transfer payments w When supply or demand curve is very inelastic, a tax leads to a small change in equilibrium quantity w Waste is the smallest when inelastic goods are taxed most heavily

Must taxes distort? w In UK most heavily taxed are alcohol and tobacco. w Cigarette smokers cause a harmful consumption externality w SS supply curve w DD private demand curve

Must taxes distort? w With no tax equilibrium is at E w Tax shifts equilibrium to F w The tax rate E*F guides the free market to efficient allocation w Low tax rate=>high consuption=>high production w Alcohol and tobacco are harmful-one of the reasons the are taxed heavily

Taxation and supply side economics w Supply side economics analyses how taxes affect national output when the economy is at full capacity w Suppose the goverment cuts spending and tax rates. What are the effects???

Taxation and supply side economics w The Laffer curve shows how much tax revenue is raised at each possible tax rate

Taxation and supply side economics w Laffer’s idea: ”Big government-big tax” countries were at tax rates above t* w Governments wish to avoid borrowing need to cut their spending if they wish to cut tax rate