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Understanding the Economic Impact of Taxes: Allocation, Principles, and Types

Taxes play a crucial role in shaping the economy by influencing resource allocation, adjusting behavior, and facilitating productivity and growth. This overview covers the economic impacts of taxes, including the incidence of a tax, the criteria for effective taxation, and the two fundamental principles: benefit and ability-to-pay. Additionally, it categorizes U.S. taxes into three main types—proportional, progressive, and regressive—highlighting their characteristics and implications for individuals and the government.

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Understanding the Economic Impact of Taxes: Allocation, Principles, and Types

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  1. Economic Impact of Taxes (cont.) • Taxes and other governmental revenues influence the economy by affecting • Resource allocation • Behavior adjustment • Sin tax • Know examples of sin taxes Section 1

  2. Economic Impact of Taxes (cont.) • Productivity and growth • Determining incidence of a tax • Understand how “incidence of a tax” works and how the burden of the tax can be shifted to the consumer depending on the nature (elasticity) of the product. Shifting the Incidence of a Tax Section 1

  3. Figure 1

  4. Criteria for Effective Taxes (cont.) • Taxes must meet 3 criteria: • Equity—impartial and just: Makes sense to avoid tax loopholes • Simplicity—tax laws written so taxpayers and collectors can understand them • Efficiency—easy to administer and successful in generating revenue Section 1

  5. Two Principles of Taxation (cont.) • United States taxes are based on two principles • Benefit principle of taxation • Limitations to the benefit principle of taxation • Those who receive government services are least likely to afford them. • Benefits are hard to measure and impact others. Section 1

  6. Two Principles of Taxation (cont.) • Ability-to-pay principle of taxation • We can’t always measure benefits derived from government spending. • Assumes individuals taxed more suffer less discomfort paying taxes Section 1

  7. Three Types of Taxes (cont.) • Three general types of taxes exist in the United States today. • Proportional tax • If the percentage tax rate is constant, the average tax rate is constant. • Medicaretax fund Three Types of Taxes Section 1

  8. Three Types of Taxes (cont.) • Progressive tax • Marginal tax rate • Regressive tax Profiles in Economics:Monica Garcia Pleiman Section 1

  9. Figure 2

  10. Types of Taxes All taxes in the United States can be broken down into three categories: proportional, progressive, and regressive VS 1

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