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Chapter 17 Public Choice Theory and the Economics of Taxation
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Tax Burden How should the tax burden be apportioned?
Benefits-received principle Problems? Ability-to-pay principle Progressive tax Regressive tax Proportional tax 17-2
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Types of Taxes – Progressive, Regressive, or Proportional?
Personal income tax progressive Sales tax regressive Corporate income tax proportional (35%) Payroll tax regressive (S.S. cap) Property tax Regressive (low property value, higher tax) 17-3
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Homework Read pgs
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Tax Incidence Who really pays the tax? Excise tax
Tax burden depends on elasticity Inelastic vs. elastic Efficiency loss of an excise tax Deadweight loss Depends on elasticity Transfer of surplus to govt. 17-5
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Tax Incidence of an Excise Tax
2 4 6 8 10 12 14 5 15 20 25 Q P St S Price (Per Bottle) Quantity (Millions of Bottles Per Month) Tax $2 D 17-6
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Efficiency Loss of a Tax
2 4 6 8 10 12 14 5 15 20 25 Q P S’ Tax Paid by Consumers S Price (Per Bottle) Quantity (Millions of Bottles Per Month) Tax $2 Efficiency Loss (or Deadweight Loss) Tax Paid by Producers D 17-7
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Tax Incidence Why impose an excise tax? Burden of the excise tax?
Discourage consumption Redistributive goals Reduce negative externality Burden of the excise tax? Depends on elasticity Availability of substitutes 17-8
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Tax Incidence and Elasticity
Smaller efficiency loss with inelastic demand Q P P Q St St Tax Tax S S a Pi a Pe b P1 P1 b De Pb Pa c c Di Q2 Q1 Q2 Q1 Tax Incidence and Elastic Demand Tax Incidence and Inelastic Demand 17-9
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Tax Incidence and Elasticity
Smaller efficiency loss with inelastic supply Q P P Q St S Tax Tax St a Pe S a Pi b P1 P1 b Pa c Pb c D D Q2 Q1 Q2 Q1 Tax Incidence and Elastic Supply Tax Incidence and Inelastic Supply 17-10
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Incidence of U.S. Taxes Workers bear full burden of:
Social security tax Medicare tax Income tax Burden of corporate income tax: Stockholders (short run) Workers (long run) 17-11
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U.S. Tax Structure Federal tax system progressive
State and local system is regressive Overall tax structure slightly progressive 17-12
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2012 Question 18 D 13 Copyright ACDC Leadership 2015
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2012 Question 19 D 14 Copyright ACDC Leadership 2015
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A
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Tax Incidence (Who pays?)
ST S ST S ST S ST S ST S D D D D D Perfectly Inelastic Relatively Inelastic Unit Elastic Relatively Elastic Perfectly Elastic Tax burden paid entirely by consumers Tax burden mostly on consumers Tax burden shared by consumers and producers Tax burden mostly on producers Tax burden paid entirely by producers Copyright ACDC Leadership 2015
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2008 Audit Exam 18.B
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