economic aspects of taxation n.
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Economic Aspects of Taxation. Ch 16. Principles of Taxation. the benefits approach and the ability-to-pay approach . The underlying question here is, who should pay, and who should pay the largest amount. benefits approach.

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principles of taxation
Principles of Taxation
  • the benefits approach
  • and the ability-to-pay approach.
  • The underlying question here is, who should pay, and who should pay the largest amount.
benefits approach
benefits approach
  • we would tax people in proportion to the benefit they receive from government programs. This may work well for things like state parks or highways.
  • those who use the parks might pay a larger share of their upkeep
the ability to pay approach
the ability-to-pay approach
  • we would tax people in proportion to their income or wealth.
  • The higher the income or wealth, the higher the taxes.
  • Some individuals would be paying for programs and services that they would never need to take advantage of.
  • the notion of fairness involves redistribution of resources within the system.
issues of fairness the notions of horizontal and vertical equity
issues of fairness the notions of horizontal and vertical equity
  • Horizontal equity implies that people who are viewed as equal should he taxed equally.
  • Vertical equity relates to the tax treatment of people with different levels of income.
progressive proportional and regressive tax
Progressive, proportional and regressive tax
  • Taxes are progressive if they take larger proportions of higher incomes and regressive if they take smaller portions of higher incomes.
direct vs indirect tax
Direct vs. indirect tax
  • direct (levied directly upon individuals or firms)
  • indirect (levied on goods and services, and hence only indirectly on individuals or firms who consume those goods and
  • services).
  • example of a direct tax is the personal income tax; an example of an indirect tax is a gasoline tax.
federal taxation
Federal Taxation
  • The federal government raises most of its revenue from individual and corporate income taxes.
  • Other federal taxes include sales and excise taxes, payroll taxes, and corporate profits taxes.
  • .
sales and excise taxes
Sales and exciseTaxes
  • Sales and excise taxes are levied as a percentage of sales or per unit of an item purchased;
  • these are controversial because they appear to be regressive.
  • Because poorer people tend to spend larger portions of their income on consumption goods, they tend to pay a larger portion of their income as sales taxes.
corporate profits taxes
corporate profits taxes;
  • Corporations must pay corporate profits taxes;
  • these are controversial in the sense that they provide disincentives for corporate investment.
payroll taxes
Payroll taxes
  • Payroll taxes are collected to pay for social insurance programs. So its proportional.
  • Payroll tax generally refers to two kinds of taxes: Taxes which employers are required to withhold from employees' pay, also known as withholding, Pay-As-You-Earn (PAYE) or Pay-As-You-Go (PAYG) tax;
  • or taxes directly related to employing a worker paid from the employer's own funds (private driver, maid: these may be either fixed charges or proportionally linked to an employee's pay.
local governments state town city
Local governments( state, town, city)
  • Local governments employ property taxes most heavily.
  • In fact, approximately 30 percent of the total revenues of state and local government are raised through property taxes.
  • (Henry George would he pleased to hear this!)
  • States rely on sales taxes and, in some cases, income taxes.
an efficient use of resources
an efficient use of resources?
  • Taxes have incentive effects and hence alter the behavior of market agents.
  • example, higher income tax rates effectively lower wage rates for workers.
  • substitution effects, and income effects.
  • Exemptions in the tax rate exist for home mortgage interest, giving people an incentive to invest in housing markets.
which goods and services can be taxed most efficiently
which goods and services can be taxed most efficiently
  • The Ramsey tax rule states that the government should levy the heaviest taxes on those inputs and outputs that are most price-inelastic in supply or demand.
  • This will result in the smallest change in quantity exchanged across the market and will generate the greatest amount of revenue for the government
efficiency vs fairness
Efficiency vs. fairness
  • However, remember that the types of goods that tend to have the most inelastic demands are necessities;
  • increasing taxes on food, fuel, water, etc. might be worrisome on the grounds of equity.
the thorny problem of tax incidence
The thorny problem of tax incidence
  • Questions of incidence ask who pays specific taxes in the form of decreased purchasing power.
  • They are related to questions about the degree to which various taxes create disincentives for people to work harder and/or save more.
  • The benefit of transfers programs tends to offset regressive treatment of low-income taxpayers.