1. Copyright 2008 The McGraw-Hill Companies 17-1 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show 17 Public Choice Theory and the Economics of Taxation

2. Copyright 2008 The McGraw-Hill Companies 17-2 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Chapter Objectives The Difficulties of Conveying Economic Preferences Through Majority Voting “Government Failure” and Why It Occurs Different Tax Philosophies and Ways to Distribute a Nation’s Tax Burden Principles Related to Tax Shifting, Tax Incidence, and Efficiency Losses From Taxes

3. Copyright 2008 The McGraw-Hill Companies 17-3 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Public Choice Theory Government Failures Revealing Preferences Through Majority Voting –Inefficient Voting Outcomes Inefficient “No” Vote Inefficient “Yes” Vote Graphically… O 17.1

4. Copyright 2008 The McGraw-Hill Companies 17-4 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Public Choice Theory Inefficient Voting Outcomes Inefficient Majority “No” Vote Inefficient Majority “Yes” Vote $300 Benefit; Tax 0 0 $700 $250 $200 $100 $350 Adams Benson Conrad “NO” “YES” “NO” MSB > MSC $1,150 > $900 Inefficient Since “NO” Wins! MSB < MSC $800 < $900 Inefficient Since “YES” Wins!

5. Copyright 2008 The McGraw-Hill Companies 17-5 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Public Choice Theory Interest Groups Political Logrolling –Logrolling – Vote Trading Paradox of Voting –Preferences –Voting Outcomes Median-Voter Model O 17.2

6. Copyright 2008 The McGraw-Hill Companies 17-6 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Government Failure Special-Interest Effect –Pork-Barrel Politics Rent-Seeking Behavior Clear Benefits, Hidden Costs Limited and Bundled Choice Bureaucracy and Inefficiency Imperfect Institutions

7. Copyright 2008 The McGraw-Hill Companies 17-7 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Apportioning the Tax Burden Benefits-Received Principle Ability-to-Pay Principle Tax Progressivity –Progressive –Regressive –Proportional Applications

8. Copyright 2008 The McGraw-Hill Companies 17-8 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Tax Incidence Elasticity and Tax Incidence –Division of Burden –Elasticities Efficiency Loss of a Tax –Tax Revenues –Efficiency Loss –Role of Elasticities G 17.1

9. Copyright 2008 The McGraw-Hill Companies 17-9 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Tax Incidence Incidence of an Excise Tax 0 2 4 6 8 10 12 14 510152025 Q P Price (Per Bottle) Quantity (Millions of Bottles Per Month) S D S’ Tax $2

10. Copyright 2008 The McGraw-Hill Companies 17-10 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Tax Incidence Elasticity and Tax Incidence –Division of Burden –Elasticities Efficiency Loss of a Tax –Tax Revenues –Efficiency Loss –Role of Elasticies

11. Copyright 2008 The McGraw-Hill Companies 17-11 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Tax Incidence 0 P QQ P 0 Tax Incidence and Elastic Demand Tax Incidence and Inelastic Demand Demand Elasticity and the Incidence of an Excise Tax DeDe DtDt Tax StSt S StSt S Q2Q2 P1P1 PePe PaPa P1P1 PiPi PbPb Q1Q1 Q2Q2 Q1Q1 a a b b c c

12. Copyright 2008 The McGraw-Hill Companies 17-12 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Tax Incidence 0 P QQ P 0 Tax Incidence and Elastic Supply Tax Incidence and Inelastic Supply Supply Elasticity and the Incidence of an Excise Tax D D S SStSt StSt P1P1 PaPa PePe P1P1 PbPb PiPi Q1Q1 Q2Q2 Q1Q1 Q2Q2 Tax a a b b c c

13. Copyright 2008 The McGraw-Hill Companies 17-13 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Tax Incidence Efficiency Loss of a Tax 0 2 4 6 8 10 12 14 510152025 Q P Price (Per Bottle) Quantity (Millions of Bottles Per Month) S D S’ Tax $2 Tax Paid by Consumers Tax Paid by Producers Efficiency Loss (or Deadweight Loss)

14. Copyright 2008 The McGraw-Hill Companies 17-14 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Incidence of U.S. Taxes Personal Income Tax Corporate Income Tax Sales and Excise Taxes Property Taxes The U.S. Tax Structure

15. Copyright 2008 The McGraw-Hill Companies 17-15 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Incidence of U.S. Taxes Taxes on Goods and Services as a Percentage of Total Tax Revenues GLOBAL PERSPECTIVE United Kingdom Netherlands Germany Italy Sweden Canada France Japan United States 0 5 10 15 20 25 30 35 32.7 30.8 29.2 26.9 26.4 26.3 25.4 20.1 17.6 Source: Organization for Economic Cooperation and Development, 2002

16. Copyright 2008 The McGraw-Hill Companies 17-16 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Government Failure E.P.A. House Building Chicago “Wilderness” Program Bison Meat, Cauliflower, and Pumpkin Supports Catfish as Livestock Spending 9,300 Special Projects in 2003 Waste and Fraud in Katrina Relief Spending Last Word “…In the News”

17. Copyright 2008 The McGraw-Hill Companies 17-17 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Key Terms public choice theorypublic choice theory logrolling paradox of votingparadox of voting median-voter modelmedian-voter model government failuregovernment failure special-interest effectspecial-interest effect rent-seeking benefits-received principlebenefits-received principle ability-to-pay principleability-to-pay principle progressive tax regressive tax proportional tax tax incidence efficiency loss of a taxefficiency loss of a tax

18. Copyright 2008 The McGraw-Hill Companies 17-18 Public Choice Theory Government Failure Apportioning the Tax Burden Tax Incidence Incidence of U.S. Taxes Last Word Key Terms End Show Next Chapter Preview… Antitrust Policy and Regulation