Chapter 17 Public Choice Theory and the Economics of Taxation
17
Public Choice Theory and the Economics of Taxation Chapter 17 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
Transcript of Chapter 17 Public Choice Theory and the Economics of Taxation
Public Choice Theory and the Economics of Taxation
Chapter 17
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
The Tax Burden
• How should the tax burden be apportioned?
• Benefits-received principle–Problems?
• Ability-to-pay principle–Problems?
• Progressive tax• Regressive tax• Proportional tax
17-2
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
Homework
•Read pgs. 413-423
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
Tax Incidence of an Excise Tax
0
2
4
6
8
10
12
14
5 10 15 20 25 Q
P
Pric
e (P
er B
ottle
)
Quantity(Millions of Bottles Per Month)
S
D
St
Tax $2
17-6
Efficiency Loss of a Tax
0
2
4
6
8
10
12
14
5 10 15 20 25 Q
P
Pric
e (P
er B
ottle
)
Quantity(Millions of Bottles Per Month)
S
D
S’
Tax $2
Tax Paid byConsumers
Tax Paid byProducers
EfficiencyLoss (or
DeadweightLoss)
17-7
Tax Incidence• Why impose an excise tax?
–Discourage consumption–Redistributive goals–Reduce negative externality
• Burden of the excise tax?–Depends on elasticity–Availability of substitutes
17-8
Tax Incidence and Elasticity
0
P
P
0
Tax Incidence andElastic Demand
Tax Incidence andInelastic Demand
Smaller efficiency loss with inelastic demand
De
Di
Tax TaxSt
S
St
S
Q2
P1Pe
PaP1
Pi
Pb
Q1 Q2Q1
aa
b
b
cc
17-9
Tax Incidence and Elasticity
0
P
P
0
Tax Incidence andElastic Supply
Tax Incidence andInelastic Supply
Smaller efficiency loss with inelastic supply
D D
S
SSt
St
P1Pa
PeP1
Pb
Pi
Q1Q2 Q1Q2
Tax Tax
aa
bb
c
c
17-10
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
U.S. Tax Structure
• Federal tax system progressive• State and local system is
regressive• Overall tax structure slightly
progressive
17-12
2012 Question 18
13Copyright ACDC Leadership 2015
14Copyright ACDC Leadership 2015
2012 Question 19
16
Tax Incidence (Who pays?)
D D DD
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
SST SST SST SSTSST
Copyright ACDC Leadership 2015
2008 Audit Exam
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