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101 lecture 12
 

101 lecture 12

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    101 lecture 12 101 lecture 12 Presentation Transcript

    • Microeconomics Lecture 12 ! Tax Systems
    • Key Terms average tax rate marginal tax rate lump-sum tax benefits principle ability-to-pay principle vertical equity horizontal equity proportional tax regressive tax progressive tax
    • Tax System Two Objectives: Efficient and Equitable Lower costs and fair
    • Avoid deadweight loss administrative burdens ! Efficient? low deadweight loss and low administrative burdens
    • Efficient? low deadweight loss and low administrative burdens
    • Administrative Burden It costs time and money to collect taxes
    • Tax Analysis 100 Supply with 40 SAR tax 90 80 40 Taxes 40 120 in taxes ! 40 to deadweight loss ! 60 50 ! 40 Buyer Surplus 70 Loss of 160 in surplus Supply with no tax 25 percent loss to deadweight Tax of 40 SAR Seller Surplus 30 40 20 10 0 Demand 0 1 2 3 4 5 6 7 8 9 10 Tax on Seller with shift Supply curve up by the amount of the tax
    • Incentives taxes distort change behavior !
    • Type of Taxes Income - Earn Consumption - Spend
    • Are Taxes Fair? Benefits ! Ability to Pay
    • Benefits You should pay for the benefits you receive !
    • Ability If you are able you should pay more
    • Tradeoffs Fair or Efficient?
    • Income Tax Rates Lump-Sum Proportional Progressive Regressive
    • Lump Sum Pay a fixed amount regardless of income
    • Proportional Pay a fixed rate regardless of income
    • Progressive Pay an increasing rate as income increases
    • Regressive Pay a decreasing rate as income increases
    • Rates Average Marginal
    • Average total taxes divided by income
    • Marginal extra tax on the next riyal of income
    • Marginal 10% on first 100 30% on the next 100 then 50% above
    • Tax Rate Income Tax First 100 10% 100 10 101 to 200 30% 100 30 more than 200 50% 100 50 Summary 30% 300 90 What is the average rate? 90 ÷ 300 = 30% Total taxes divided by total income What is the marginal rate? 50% Rate on the next riyal
    • 100 75 50 25 0 First 100 Second 100 Third 100
    • Incentives Matter Change the rates ! Change behavior
    • Art Laffer Laffer Curve
    • Dropped Top Marginal Income Tax Rate from 70% to 28% Maximum Revenue $ Tax Revenue No Revenue 0% 10% 20% 30% 40% 50% 60% Tax Rate 70% 80% 90% 100%
    • Income above $200,000 Pie x 8.7 Taxes x 4.2 1980 70% Rate $36 billion - $19 billion Smaller slice of a larger pie 1988 28% Rate $352 billion - $100 billion