Introduction to Taxes(part 2)

Introduction to Taxes:

2.) Graphing Taxes3.) Efficacy and Fairness of Taxes

1.) Some Tax Basics

So now we ask the question, exactly how are these taxes going to be paid?

1.) Some Tax BasicsWhat a Tax does in the Market:

- raises the price buyers pay - lowers the price sellers

receive. - reduces the quantity bought sold.

Purposes of Taxes: -Raise money to purchase the things that markets usually don’t make. -(public goods)

-Restrict certain behaviors. -(market failure)

-Reallocate 重新分配 wealth. (subsidies)

Direct Taxes-Taxes based on ownership.-Paid directly to the government by people.

-Example:-Income taxes, property taxes.

Indirect Taxes-Taxes paid on a market transaction.-Sellers usually pay to the government.

-Example:-sales taxes, VAT taxes.

1.) Some Tax Basics - types

Only studying indirect taxes in the market right now, but some of this

deals with direct taxes too.

It’s not fair if the RESULT isn’t fair

It’s not fair if the RULES aren’t fair

The question that governments have to deal with:

Only studying indirect taxes in the market right now, but some of this

deals with direct taxes too.

Introduction to Taxes:

2.) Graphing Taxes3.) Efficacy and Fairness of Taxes

1.) Some Tax Basics

Those who benefit from public spending should bear the burden of the tax that pays for that spending.

Two principles:1.) Benefits

Principle:

Equity vs. Efficiency 公平与效率

3.) Efficacy and Fairness of Taxes

The idea is if you use it you should pay for it!

The idea is if you use it you should pay for it!

The idea is if you use it you should pay for it!

The idea is if you use it you should pay for it!

The idea is if you use it you should pay for it!

The idea is if you use it you should pay for it!

The idea is if you use it you should pay for it!

The idea is if you use it you should pay for it!

You can see this has limits…

Two principles:

1.) Benefits Principle:

Equity vs. Efficiency 公平与效率

3.) Efficacy and Fairness of Taxes

2.) Ability to Pay Principle :

Those with greater ability to pay a tax should pay more tax.

Maybe they can pay more then others!

Maybe they can pay more then others!

Maybe they can pay more then others!

But if you worked hard to earn it, is it fair the government takes MORE away from you for doing a good job?

Maybe they can pay more then others!

But if you worked hard to earn it, is it fair the government takes MORE away from you for doing a good job?

So this might not be the most fair either….

Subjective 主观

Equity vs. Efficiency 公平与效率

3.) Efficacy and Fairness of Taxes

Positive economics is the study of what is结果是基于数据

Normative economics is the study of what should be 是基于你的愿望是什么结果

There are a few different angles to view the same problem…

Introduction to Taxes:

2.) Graphing Taxes3.) Efficacy and Fairness of Taxes

1.) Some Tax Basics

Three ways to view types of Taxes:I. Proportional TaxII. Progressive TaxIII. Regressive Tax

A tax whose average rate is constant at all income levels. - Everyone pays the same amount.

Examples:

Value added tax (VAT): tax on stages of production.

Flat tax: same tax rate to all people.

3.) Efficacy and Fairness of Taxes

Three ways to view types of Taxes:

I. Proportional Tax

Proportional Taxes

Poor Rich Average

A tax whose average rate is constant at all income levels.

pay10%

pay10%

pay10%

Ceteris Paribus, everyone pays the same amount when they buy things.

3.) Efficacy and Fairness of Taxes

Three ways to view types of Taxes:I. Proportional Tax

II. Progressive Tax(Marginal Tax)

A tax whose average rate increases as income increases.- The more money you have, the more you pay.Examples:

Luxury taxes: take a guess what this means.

Income tax: depends on the income of people. ***(direct tax)

Property tax: depends on the value of property, such as the value of a home.

Direct Taxes-Taxes based on ownership.-Paid directly to the government by people.

-Example:-Income taxes, property taxes.

Indirect Taxes-Taxes paid on a market transaction.-Sellers usually pay to the government.

-Example:-sales taxes, VAT taxes.

1.) Some Tax Basics - types

This is usually only possible with direct taxes.

Progressive Taxes

Poor Rich Average

A tax whose average rate increases as income increases.

pay10%

pay15%

pay20%

3.) Efficacy and Fairness of Taxes

Three ways to view types of Taxes:I. Proportional TaxII. Progressive Tax

A tax whose average rate decreases as income increases.- The more money you have the smaller the proportion of your income goes to taxes.Example:

Most Sales taxes: Some are regressive like cigarettes and sales of other things with inelastic demand curves. Things that are necessities

III. Regressive Tax

Direct Taxes-Taxes based on ownership.-Paid directly to the government by people.

-Example:-Income taxes, property taxes.

Indirect Taxes-Taxes paid on a market transaction.-Sellers usually pay to the government.

-Example:-sales taxes, VAT taxes.

1.) Some Tax Basics - types

Most types of taxes in the market tend to be reggresive.

Regressive Taxes

Poor Rich Average

A tax whose average rate decreases as income increases.

pay10%

pay6%

pay2%

So to Summarize…

1.) Some Tax BasicsWhat a Tax does in the Market:

- raises the price buyers pay - lowers the price sellers

receive. - reduces the quantity bought sold.

Purposes of Taxes: -Raise money to purchase the things that markets usually don’t make. -(public goods)

-Restrict certain behaviors. -(market failure)

-Reallocate 重新分配 wealth. (subsidies)

Tax effects on the market

1.) Some Tax basics

- Tax increase prices, it doesn’t change your idea of a product (Demand)

- but it does change how much you are willing to buy. (Quantity Demanded )

P

Q

D

S

PS

PB

QEQT

S1

2.) Graphing Taxes

- lowers the price sellers receive.

- reduces the quantity bought sold.

wedge

P

Q

D

S

PS

PB

QEQT

A

B C

D E

F

CS = APS = FTax revenue = B buyer pays

+ D seller pays

Total surplus= A + B + D + F

With the tax,

The tax reduces total surplus by C + E

The Welfare Effects of a Tax

CASE 1: Supply is more elastic than demand

P

QD

S

Tax

Buyers’ share of tax burden

Sellers’ share of tax burden

Price if no tax

PB

PS

3.5) Elasticity of Taxes and Tax Incidence

It’s easier for seller than buyers to leave the market.So buyers bear most of the burden of the tax.

Two principles:

Equity vs. Efficiency 公平与效率

3.) Efficacy and Fairness of Taxes

2.) Ability to Pay Principle :

1.) Benefits Principle :

Those with greater ability to pay a tax should pay more tax.

Those who benefit from public spending should bear the burden of the tax that pays for that spending.

Introduction to Taxes:

2.) Graphing Taxes3.) Efficacy and Fairness of Taxes

1.) Some Tax Basics

Three ways to view types of Taxes:I. Proportional TaxII. Progressive TaxIII. Regressive Tax

Equity vs. Efficiency 公平与效率

3.) Efficacy and Fairness of Taxes

Positive economics is the study of what is结果是基于数据

Normative economics is the study of what should be 是基于你的愿望是什么结果

The EndThank you