1. Public Choice Theory and the Economics of Taxation Chapter 17

2. Revealed preference through voting Voters vote individual preferences favors outcomes where large benefits are received by minorities, at low cost to the majority Voters will vote against measures that have negative net benefits for the majority, but may have positive net benefits overall Voters will vote for measures that have positive net benefits for the majority, but may have negative net benefits overall

4. Voters as interest groups Where benefits are concentrated, there is an incentive to lobby and provide campaign contributions to achieve political ends No opposing counterweight if costs are not similarly concentrated We all end up paying for many programs which only benefit such interest groups Logrolling can partly undo this bias

7. Median voter model The median voter is the one whose preferences are realized in public policy Most voters will be dissatisfied, because a clear majority will desire either more or less government, taxes, services, etc. These groups will generally cancel out

8. Tax apportionment Benefits-received principle—charge user fees Ability-to-pay principle—progressive income tax  Progressive tax—average tax rate increases with income— becomes a higher absolute amount and a higher percentage of total income, as income increases  Regressive tax—average tax rate falls with higher income— becomes a higher absolute amount, but a lower percentage of income, as income increase  Proportional tax—average rate remains the same as income rises or falls—tax increases absolutely with higher income

9. Examples Income tax—progressive 10 – 35% Sales tax—highly regressive, though some exempt items (food, and in some states, small purchases of clothing) are designed to mitigate this effect Corporate income tax—proportional, but proprietorships, partnerships, and closely-held corporations are exempt Payroll taxes (Social Security & Medicaid)—regressive because high levels of payroll income, and all non-wage income is exempt Property taxes—regressive like sales tax

10. Tax incidence and efficiency loss Excise taxes are jointly borne by producers and consumers, depending on demand and supply elasticities They also result in deadweight loss Producer and consumer surplus which is completely wiped out and not captured by the government

13. Demand elasticity and sales tax incidence The more elastic demand (the flatter the demand curve), the more tax incidence (for an excise or sales tax on a particular product) is shifted to producers, because consumers buy significantly less in response to the higher after-tax price The less elastic demand (the steeper the demand curve), the more the tax burden is carried by consumers, who buy nearly the same quantity regardless of the after-tax price

15. Supply elasticity and tax incidence The more elastic supply (the flatter the supply curve), the more of the tax burden is paid by consumers The less elastic supply (the steeper the supply curve), the more the tax burden is paid by producers.

17. Goals for taxation Government revenue Income redistribution  Rich to poor  Poor to rich  Their party to my party Reduce negative externalities  E.g., excise taxes on products with negative externalities

20. U.S. tax incidence Federal taxes are generally progressive State and local taxes are generally less so, often being highly regressive Overall, U.S. taxes are mildly progressive, but this varies from state to state, and even among municipalities within a given state