1. Public Goods, Taxes & Income Distribution Chapter 11

2. 2 KINDS OF GOODS Public Goods Goods that are neither excludable nor rival in consumption Private Goods Goods that are both excludable & rival in consumption Rival- consumption by one reduces quantity for others Excludable- consumer who can not pay are excluded Public Goods: clean air, police protection, radio signals, national defense Private Goods: Food, Coffee, airline tickets

3. Public Good Efficiency When goods are available free of charge => market forces will not allocate resources efficiently Government should collect taxes & provide public goods when: – Total Benefits ≥ Total Costs Examples: –National Defense –Basic Research –Fighting Poverty

4. Problems with Public Goods Free-rider- a person who receives the benefit of a good but avoids paying for it Examples: –“ Slacker” in group work at School –Volunteer money for neighborhood cleanup –Fundraising for Fire Department

5. Types of Taxes Progressive Tax- –Income ↑ => Average Tax Rate ↑ –Example: U.S. Federal Income Tax Regressive Tax- –Income ↑ => Average Tax Rate ↓ –Example: Sales Tax, Gasoline Tax, Bridge Tax Proportional Tax –Income ↑ or ↓ => Average Tax Rate stays the same –Example: Flat Income Tax, Corporate Taxes Excise Tax –Flat fee per unit, paid at purchase –Example: Cigarettes, Gasoline (both are also regressive in tax incidence) Tax Incidence: Who Pays?

6. Progressive Income Tax Example: If you Earn $100,000 ($ 7,000 - 0 ) x 10% = $700 (28,400 - 7,000 ) x 15% = 3,210 (68,800 - 28,400 ) x.25 % = 10,100 (100,000 - 68,800 ) x.28% = 8,736 Total: $ 22,746 Actual Tax Rate: 22.7% Tax Brackets }

7. Income Distribution & Lorenz Curve Egalitarian Society- equal society How to best measure Inequality: Average Income: incomplete measure often inaccurate Distribution of Income more precise measure of inequality Lorenz Curve illustrates income distribution

8. Gini Index Summary Measures the distance from line of “perfect equality” to Lorenz Curve Gini Index ranges from Zero to 1 An index of 0 (zero) means perfect EQUALITY (on line) As the Gini Index moves from 0  1 inequality increases

9. U.S. Gini Index Comparison U.S.A..46 Japan.26 Germany.32 France.33 Bolivia.58 Brazil.59

10. Worksheets What is a Fair Tax Worksheet A: Who pays the most Taxes

11. Tax Cut Controversy