2. 31 - 1 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Public Choice Theory and The Economics of Taxation 31 C H A P T E R

3. 31 - 2 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show PUBLIC CHOICE THEORY Government Failures Public Choice Collective Decisions Revealing Preferences Through Majority Voting Inefficient Voting Outcomes

4. 31 - 3 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Majority Voting: Fails to take into account the strength of the preferences of individual voters - and may yield economically inefficient outcomes... PUBLIC CHOICE THEORY

5. 31 - 4 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Majority Voting: Inefficient Voting Outcomes COMPARE $300 TAX TO PERSONAL BENEFIT OF A PUBLIC GOOD Adams - BENEFIT $700 - "YES" Benson - BENEFIT $250 - "NO" Conrad - BENEFIT $200 - "NO" PUBLIC CHOICE THEORY The “No” Votes Win but, the decision is inefficient…

6. 31 - 5 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Benefit; Tax $700 $250 $200 $300 (YES) (NO) An Inefficient “NO” Vote Adams Benson Conrad The NO vote wins but is inefficient since... PUBLIC CHOICE THEORY

7. 31 - 6 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Benefit; Tax $700 $250 $200 $300 (YES) (NO) An Inefficient “NO” Vote Adams Benson Conrad The NO vote wins but is inefficient since... MSB $1,150 > MSC $900 PUBLIC CHOICE THEORY

8. 31 - 7 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Benefit; Tax $700 $250 $200 $300 (YES) (NO) An Inefficient “NO” Vote Adams Benson Conrad The NO vote wins but is inefficient since... MSB $1,150 > MSC $900 PUBLIC CHOICE THEORY How about an inefficient “YES” vote?

9. 31 - 8 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Benefit; Tax $100 $350 $300 (NO) (YES) An Inefficient “YES” Vote Adams Benson Conrad The Yes vote wins but is inefficient since.... PUBLIC CHOICE THEORY

10. 31 - 9 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Benefit; Tax $100 $350 $300 (NO) (YES) An Inefficient “YES” Vote Adams Benson Conrad The Yes vote wins but is inefficient since.... PUBLIC CHOICE THEORY MSB $800 < MSC $900

11. 31 - 10 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show PUBLIC CHOICE THEORY Interest Groups Political Logrolling Paradox of Voting Median-Voter Model

12. 31 - 11 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Special Interest Effect Rent-Seeking Behavior Clear Benefits, Hidden Costs Limited and Bundled Choice Bureaucracy and Inefficiency Imperfect Institutions GOVERNMENT FAILURE

13. 31 - 12 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show APPORTIONING THE TAX BURDEN Benefits-Received Principle Ability-to-Pay Principle Progressive Tax Regressive Tax Proportional Tax

14. 31 - 13 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show TAX APPLICATIONS: Personal Income Tax Progressive Sales Tax Regressive Corporate Income Tax Proportional - Regressive Payroll Taxes Regressive Property Taxes Regressive Identify whether progressive, regressive, or proportional

15. 31 - 14 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show TAX INCIDENCE AND EFFICIENCY LOSS Division of Burden Elasticities: With a specific supply - Greater elasticity = greater shift to consumers With a specific demand - The more inelastic the supply - the greater the portion borne by producers

16. 31 - 15 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Tax Revenues Efficiency Loss of a Tax Role of Elasticities Qualifications Redistributive Goals Reducing Negative Externalities TAX INCIDENCE AND EFFICIENCY LOSS

17. 31 - 16 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show Personal Income Tax Individual Corporate Income Tax Stockholders – Consumers Sales and Excise Taxes Consumers Property Taxes Owner or Renter PROBABLE INCIDENCE OF U.S. TAXES THE U.S. TAX STRUCTURE

18. 31 - 17 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show United Kingdom Netherlands France Germany Italy Canada Sweden United States Japan 0 5 10 15 20 25 30 35 1997 DATA GLOBAL PERSPECTIVE Taxes on Goods and Services as a Percentage of Total Tax Revenues, Selected Nations Source: Organization for Economic Cooperation and Development

19. 31 - 18 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show THE ISSUE OF FREEDOM The Conservative Position Chapter Conclusions The Liberal Position Fallacy of Limited Decisions

20. public choice theory logrolling paradox of voting median-voter model government failure special-interest effect rent seeking benefits-received principle ability-to-pay principle progressive tax regressive tax proportional tax tax incidence efficiency loss of a tax fallacy of limited decisions ENDBACK Copyright McGraw-Hill/Irwin 2002

21. 31 - 20 Copyright McGraw-Hill/Irwin, 2002 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Applications Tax Incidence and Efficiency Loss The U.S. Tax Structure The Issue of Freedom Key Terms Previous Slide Next Slide End Show N e x t : C h a p t e r 3 2 Antitrust, Regulation, and Industrial Policy