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HONORS ECONOMICS TAXATION. $. $. $. $. $. $. $. $. $. $. $. $. $. $. $. $. $. $. $. $. $. $. $. $. GOVERNMENT AS ORGANIZED CRIME. GOVERNMENT = ORGANIZED CRIME  PROTECTION FOR MONEY ROVING BANDITS – TAKE 100 % OF THE WEALTH TAKE THE MONEY & RUN

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GOVERNMENT AS ORGANIZED CRIME

GOVERNMENT = ORGANIZED CRIME  PROTECTION FOR MONEY

ROVINGBANDITS – TAKE 100% OF THE WEALTH TAKE THE MONEY & RUN

STATIONARYBANDITS – TAKE LESS THAN 100%

deadweight losses

INCOME

DEADWEIGHT LOSSES

TAXES INCREASE PRICE OF GOODS & SERVICES

TAXING WAGES  HIGHER PRICE FOR LABOR

TAXING CAPITAL  HIGHER COST OF INVESTMENT

HIGHER PRICE  LOWER QUANTITY DEMANDED  REDUCTION IN SUPPLY LESS ECONOMIC ACTIVITY / LOWER GROWTH

TAX RATE

laffer curve
LAFFER CURVE

GOVERNMENTS WANT TO MAXIMIZE REVENUES

REVENUES = TAX RATE * ECONOMIC ACTIVITY

HIGHER TAXES  LESS ECONOMIC ACTIVITY  LOWER NET REVENUE

CUTTING TAXES  MORE ECONOMIC ACTIVITY  HIGHER NET REVENUES

vertical and horizontal equity

EFFECTIVE CORPORATE TAX RATES ON DIFFERENT SECTORS, 1981

  • AVERAGE 20.5 %
    • CAPITAL-INTENSIVE SECTORS
      • MINING9.4 %
      • PAPER & LUMBER4.0%
      • TRANSPORTATION-4.8%
      • UTILITIES11.5%
      • AEROSPACE13.5%
      • CHEMICALS13.6 %
    • LABOR-INTENSIVE SECTORS
      • PUBLISHING & PRINTING36.3 %
      • TOBACCO31.4 %
      • FOOD RETAILERS (GROCERY STORES)30.8%
      • NON FOOD RETAIL (DEPARTMENT STORES)22.0 %
    • HIGH TECHNOLOGY
      • ELECTRONICS & APPLIANCES29.3 %
      • OFFICE EQUIPMENT26.7 %
    • FINANCIAL
      • COMMERCIAL BANKS-12.6%
VERTICAL AND HORIZONTAL EQUITY

HOW DO YOU KNOW IF TAXES ARE FAIR?

VERTICAL EQUITY – SHOULD DIFFERENT INDIVIDUALS BE TAXED SIMILARLY OR DIFFERENT

  • BENEFIT PRINCIPLE – TAXED RELATIVE TO BENEFIT

Ex. TOLL ROADS, HUNTING LICENSES, SSI EXEMPTIONS

  • ABILITY TO PAY PRINCIPLE – HIGHER INCOME = HIGHER TAX RATE

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PROGRESSIVE : BURDEN HEAVIER ON HIGHER INCOMES

Ex. INCOME & CORPORATE TAXES

REGRESSIVE: BURDEN HEAVIER ON LOW INCOMES

Ex. PAYROLL & CONSUMPTION TAXES

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HORIZONTAL EQUITY: EQUAL INCOME = EQUAL TAXES

$1 EARNED TEACHING = $1 EARNED NURSING

$1 SPENT ON CIGARETTES = $1 SPENT ON CANDY

types of taxes
TYPES OF TAXES

INCOME TAXES: (PROGRESSIVE) TAXES PROFITS OR NET INCOME  FUNDS FEDERAL DISCRETIONARY REVENUES

PAYROLL TAXES: (REGRESSIVE) TAXES EARNINGS FOR NON-DISCRETIONARY ENTITLEMENT PROGRAMS SUCH AS SOCIAL SECURITY & MEDICAID

PROPERTY TAXES: (REGRESSIVE) TAXES THE ASSESSED VALUE OF ASSETS INCLUDING REAL ESTATE FOR LOCAL GOVERNMENT EXPENSES SUCH AS SCHOOLS, FIRE, & POLICE DEPARTMENTS

EXCISE TAXES: (REGRESSIVE) “SIN” TAXES THAT TARGET CONSUMPTION OF SPECIFIC ITEMS SUCH AS TOBACCO, ALCOHOL, & IMPORTED GOODS.

SALES TAXES: (REGRESSIVE) TAXES SPENDING TO SUPPORT STATE & LOCAL GOVERNMENTS

USER FEES: TAXES SPECIFIC GOVERNMENT SERVICES  TOLL ROADS (THRUWAY / BRIDGES), LICENSES (HUNTING / DRIVING)

INFLATION & INTEREST RATES : (PROGRESSIVE/REGRESSIVE)

INFLATION SHIFTS WEALTH FROM CREDITORS  DEBTORS

INTEREST RATES SHIFT WEALTH DEBTORS CREDITORS

corporate income taxes
CORPORATE INCOME TAXES

BUSINESSES ORGANIZE AS PARTNERSHIPS OR LIMITED LIABILITY CORPORATIONS

CORPORATIONS ARE “LEGAL INDIVIDUALS” THAT SHIELD OWNERS (STOCKHOLDERS) FROM BUSINESS DEBTS & LOSSES

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FOR THIS PRIVILEGE, GOVERNMENTS CHARGE A “FEE” BY TAXING CORPORATE PROFITS LIKE INDIVIDUAL INCOME

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HIGHER TAXES  DISINCENTIVE TO INVESTMENT, CAPITAL ACCUMULATION & ECONOMIC GROWTH

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THEREFORE, GOVERNMENTS HAVE CUT CORPORATE TAXES TO PROMOTE ECONOMIC GROWTH

capital gains taxes
CAPITAL GAINS TAXES

CAPITAL GAIN = APPRECIATION IN VALUE IN AN ASSET (STOCK) BETWEEN BUYING & SELLING

CONSERVATIVES  “DOUBLE TAXATION” BECAUSE THEY ARE TAXED AS BOTH

        • CORPORATE INCOME

b) CAPITAL GAINS

HOWEVER . . .

  • INDIVIDUALS CAN TIME WHEN TO “REALIZE” A CAPITAL GAIN BY CHOOSING WHEN THEY MONETIZE (SELL) THEIR ASSET
  • CAPITAL GAINS TAXED LOWER THAN INCOME  INVESTORS PAY LOWER TAXES THAN WAGE EARNERS
  • CAPITAL DEPRECIATION / LOSSES ARE BOOKED CONTINUOUSLY BY A STATUTORY AVERAGE  SIGNIFICANT TAX ADVANTAGES
pigovian excise taxes
PIGOVIAN & EXCISE TAXES

WHEN A DEMAND CURVE IS VERTICAL, CHANGES IN PRICE WILL NOT CHANGE THE QUANTITY DEMANDED

“SIN TAXES” (EXCISE TAXES) ON ADDICTIVE BEHAVIOR : TOBACCO, ALCOHOL, GASOLINE & GAMBLING = GOOD REVENUE SOURCES

INHERITANCE TAXES  CANNOT AVOID DYING

YOU MAY ALSO TAX TO DISCOURAGE BEHAVIOR – FINES, SPEEDING TICKETS, CARBON & CALORIE TAXES

PIGOVIAN TAX: HIGHER TAXES = HIGHER SOCIAL WELFARE

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TAX EXPENDITURE: TAX DEDUCTIONS TO ENCOURAGE BEHAVIOR: MORTGAGE INTEREST, HEALTH BENEFITS, EDUCATIONAL COSTS

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