2. Excise Taxes, Unit Taxes, Ad Valorem Taxes
Placed on sale of specific good/service
Unit tax
Certain amount per unit of good sold
Ad valorem tax
Fixed percentage of value of taxed goods

3. Unit Taxes Versus Ad Valorem Taxes

4. Unit Taxes Versus Ad Valorem Taxes

5. Unit Taxes versus Ad Valorem Taxes
Fluctuation in price of good
Amount per unit from unit tax unchanged
Amount per unit from ad valorem tax fluctuates

6. Unit Taxes and Ad Valorem Taxes
Advantages of unit taxes
Amount of tax not affected by price of good
Disadvantages
Favor expensive units
Inflation can have adverse effect on real tax
Advantages of ad valorem taxes
Unaffected in real terms by inflation
Less appropriate when value of a good cannot be easily determined

7. Revenues from Excise Taxes
Small source of government revenue
Closely related to user charges at federal level

8. User Charges and Efficiency
Minimize excess burden of taxation
Acts as price for public sector output
Acts as rationing device
May be desirable even when marginal cost is zero

9. User Charges and Demand Revelation
Allow producers to gauge consumer demand

10. User Charges and Equity
Satisfy benefit principle of taxation
Disadvantages: redistributional programs
Difficult to determine who benefits and how benefits are shared
Costly to charge user fees because of non-excludability

11. Approximating User Charges in the Real World
User charges may be difficult to approximate
User Charges as Taxes
Similar to market prices
Are among most effective and fair methods of taxation when feasible

12. User Charges and Public Enterprise
Output can be provided more efficiently when user fees employed as method of taxation
Revenues and User Fees
Makes up substantial amount of state and local government revenues

13. Import and Export Taxes
Import duty (tariff) – tax levied on imported goods
Easy transactions to monitor and collect
Important source of revenue for less developed countries

14. Import Taxes and Trade Restrictions
Used in developed countries to discourage imports
Trade barriers politically produced protection for domestic industries
Reduction of trade barriers would increase value of total world output

15. Quotas Law restricting quantity of good that can be imported
No tax is collected
Less beneficial than a tariff to public
More beneficial to interest groups

16. Effects of Quotas and Tariffs

17. Trade Agreements Established to keep trade barriers low
Countries agree not to subsidize exporting industries
GATT, WTO, EU, NAFTA

18. General Sales Taxes Ad Valorem tax on all retail sales
Effects similar to an excise tax
Restricts level of output
Raises prices
Approximates tax on taxpayer’s level of consumption

19. Is the Sales Tax Regressive?
Often viewed as regressive with respect to income
Should consider income over life cycle
Sales Taxes and the Internet
Cannot tax internet access
Fear that internet will lead to decline in state sales tax revenues
Streamlined Sales Tax Project

20. Income and Substitution Effects
Increased relative price causes substitution from one good to another
Income effect
Effect of lowering an individual’s income

21. Possible Effects of a Consumption Tax

22. Turnover Taxes Paid as fixed percentage of value of transaction
Taxes all transactions
Inefficient, discourages transactions
Encourages vertical integration

23. Value Added Tax (VAT)
Tax on value added by each producer in economy

24. VAT versus Sales Tax VAT Sales tax Levied on suppliers
No need to distinguish between retail and wholesale purchasers
Sales tax
Levied on demanders
Easier to collect
Easier to calculate

25. Value Added Tax in European Union
European Community nations use a VAT as major source of revenue
Taxes on goods and services are heavier than in the U.S.

26. Visibility of the Tax More difficult to evade a VAT
Taxpayers may be less resistant to paying the tax
May be politically more popular than a sales tax because its effects are more likely to be misunderstood