Chap 12

1,621 views
1,565 views

Published on

Published in: Business, Technology
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,621
On SlideShare
0
From Embeds
0
Number of Embeds
243
Actions
Shares
0
Downloads
47
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Chap 12

  1. 1. The Design of the Tax System Chapter 12 Monday, January 25, 2010
  2. 2. “In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 100 80 60 40 20 0 1789 Monday, January 25, 2010
  3. 3. “In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 100 Taxes paid in Ben Franklin’s time 80 accounted for 5 60 percent of the 40 average American’s 20 income. 0 1789 Monday, January 25, 2010
  4. 4. “In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 100 80 60 40 20 0 1789 Today Monday, January 25, 2010
  5. 5. “In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 100 Today, taxes 80 account for up 60 to a third of the average 40 American’s 20 income. 0 1789 Today Monday, January 25, 2010
  6. 6. Government Revenue as a Percentage of GDP Monday, January 25, 2010
  7. 7. Central Government Tax Revenue as a Percent of GDP Monday, January 25, 2010
  8. 8. The Federal Government Monday, January 25, 2010
  9. 9. The Federal Government The U.S. federal government collects about two-thirds of the taxes in our economy. Monday, January 25, 2010
  10. 10. The Federal Government Monday, January 25, 2010
  11. 11. The Federal Government The largest source of revenue for the federal government is the individual income tax. Monday, January 25, 2010
  12. 12. Tax Liability Monday, January 25, 2010
  13. 13. Tax Liability With respect to paying income taxes, an individual’s tax liability (how much he/she owes) is based on total income. Monday, January 25, 2010
  14. 14. Individual Income Taxes Monday, January 25, 2010
  15. 15. Individual Income Taxes uThe marginal tax rate is the tax rate applied to each additional dollar of income. Monday, January 25, 2010
  16. 16. Individual Income Taxes uThe marginal tax rate is the tax rate applied to each additional dollar of income. uHigher-income families pay a larger percentage of their income in taxes. Monday, January 25, 2010
  17. 17. Federal Income Tax Rates: 1999 Monday, January 25, 2010
  18. 18. The Federal Government and Taxes Monday, January 25, 2010
  19. 19. The Federal Government and Taxes uPayrollTaxes: tax on the wages that a firm pays its workers. Monday, January 25, 2010
  20. 20. The Federal Government and Taxes uPayroll Taxes: tax on the wages that a firm pays its workers. uSocial Insurance Taxes: revenue from these taxes is earmarked to pay for Social Security and Medicare. Monday, January 25, 2010
  21. 21. The Federal Government and Taxes uPayroll Taxes: tax on the wages that a firm pays its workers. uSocial Insurance Taxes: revenue from these taxes is earmarked to pay for Social Security and Medicare. uExcise Taxes: taxes on specific goods like gasoline, cigarettes, and alcoholic beverages. Monday, January 25, 2010
  22. 22. Receipts of the Federal Government: 1999 Monday, January 25, 2010
  23. 23. Receipts of the Federal Government: 1999 Monday, January 25, 2010
  24. 24. Receipts of the Federal Government... Individual Income Tax, 48% Social Insurance Tax, 34% Corporate Tax, 10% Excise Tax, 4% Other, 4% Monday, January 25, 2010
  25. 25. Federal Government Spending Monday, January 25, 2010
  26. 26. Federal Government Spending u Government spending includes transfer payments and the purchase of public goods and services. Monday, January 25, 2010
  27. 27. Federal Government Spending u Government spending includes transfer payments and the purchase of public goods and services. u Transfer payments are government payments not made in exchange for a good or a service. Monday, January 25, 2010
  28. 28. Federal Government Spending u Government spending includes transfer payments and the purchase of public goods and services. u Transfer payments are government payments not made in exchange for a good or a service. u Transfer payments are the largest of the government’s expenditures. Monday, January 25, 2010
  29. 29. Federal Government Spending Monday, January 25, 2010
  30. 30. Federal Government Spending Expense Category: Monday, January 25, 2010
  31. 31. Federal Government Spending Expense Category: u Social Security Monday, January 25, 2010
  32. 32. Federal Government Spending Expense Category: u Social Security u National Defense Monday, January 25, 2010
  33. 33. Federal Government Spending Expense Category: u Social Security u National Defense u Net Interest Monday, January 25, 2010
  34. 34. Federal Government Spending Expense Category: u Social Security u National Defense u Net Interest u Income Security Monday, January 25, 2010
  35. 35. Federal Government Spending Expense Category: u Social Security u National Defense u Net Interest u Income Security u Medicare Monday, January 25, 2010
  36. 36. Federal Government Spending Expense Category: u Social Security u National Defense u Net Interest u Income Security u Medicare u Health Monday, January 25, 2010
  37. 37. Federal Government Spending Expense Category: u Social Security u National Defense u Net Interest u Income Security u Medicare u Health u Other Monday, January 25, 2010
  38. 38. Federal Government Spending: 1999 Category Amount Amount per Percent of (billions) Person Spending Social security $ 393 $1,445 23% National defense 277 1,018 16 Net interest 243 893 14 Income security 227 837 13 Medicare 205 754 12 Health 143 526 8 Other 239 879 14 Monday, January 25, 2010
  39. 39. Federal Government Spending: 1999 Category Amount Amount per Percent of (billions) Person Spending Social security $ 393 $1,445 23% National defense 277 1,018 16 Net interest 243 893 14 Income security 227 837 13 Medicare 205 754 12 Health 143 526 8 Other 239 879 14 Total $1,727 $6,350 100% Monday, January 25, 2010
  40. 40. Federal Government Spending: 1999... Social Security, 23% Defense, 16% Net Interest, 13% Income security, 14% Medicare, 12% Health, 8% Other, 14%, Monday, January 25, 2010
  41. 41. Financial Conditions of the Federal Budget Monday, January 25, 2010
  42. 42. Financial Conditions of the Federal Budget uA budget deficit occurs when there is an excess of government spending over government receipts. Monday, January 25, 2010
  43. 43. Financial Conditions of the Federal Budget uA budget deficit occurs when there is an excess of government spending over government receipts. uGovernment finances the deficit by borrowing from the public. Monday, January 25, 2010
  44. 44. Financial Conditions of the Federal Budget Monday, January 25, 2010
  45. 45. Financial Conditions of the Federal Budget uA budget surplus occurs when government receipts are greater than government spending. Monday, January 25, 2010
  46. 46. Financial Conditions of the Federal Budget uA budget surplus occurs when government receipts are greater than government spending. uA budget surplus may be used to reduce the government’s outstanding debts. Monday, January 25, 2010
  47. 47. State and Local Governments Monday, January 25, 2010
  48. 48. State and Local Governments State and local governments collect about 40 percent of taxes paid. Monday, January 25, 2010
  49. 49. State and Local Government Receipts Taxes $ Monday, January 25, 2010
  50. 50. State and Local Government Receipts u Sales Taxes Taxes $ Monday, January 25, 2010
  51. 51. State and Local Government Receipts u Sales Taxes u Property Taxes Taxes $ Monday, January 25, 2010
  52. 52. State and Local Government Receipts u Sales Taxes u Property Taxes u Individual Income Taxes Taxes $ Monday, January 25, 2010
  53. 53. State and Local Government Receipts u Sales Taxes u Property Taxes u Individual Income Taxes u Corporate Income Taxes Taxes $ Monday, January 25, 2010
  54. 54. State and Local Government Receipts u Sales Taxes u Property Taxes u Individual Income Taxes u Corporate Income Taxes Taxes $ u Other Monday, January 25, 2010
  55. 55. State and Local Government Spending Monday, January 25, 2010
  56. 56. State and Local Government Spending u Education Monday, January 25, 2010
  57. 57. State and Local Government Spending u Education u Public Welfare Monday, January 25, 2010
  58. 58. State and Local Government Spending u Education u Public Welfare u Highways Monday, January 25, 2010
  59. 59. State and Local Government Spending u Education u Public Welfare u Highways u Other Monday, January 25, 2010
  60. 60. Receipts of State and Local Governments: 1996 Monday, January 25, 2010
  61. 61. Receipts of State and Local Governments: 1996 Monday, January 25, 2010
  62. 62. Spending of State and Local Governments: 1996 Category Amount Amount per Percent of (billions) Person Spending Education $ 399 $1,506 33% Public welfare 197 743 17 Highways 79 298 7 Other 518 1,955 43 Monday, January 25, 2010
  63. 63. Spending of State and Local Governments: 1996 Category Amount Amount per Percent of (billions) Person Spending Education $ 399 $1,506 33% Public welfare 197 743 17 Highways 79 298 7 Other 518 1,955 43 Total $1,193 $4,502 100% Monday, January 25, 2010
  64. 64. Policymakers have two objectives in designing a tax system... Monday, January 25, 2010
  65. 65. Policymakers have two objectives in designing a tax system... Ê Efficiency Monday, January 25, 2010
  66. 66. Policymakers have two objectives in designing a tax system... Ê Efficiency Ë Equity Monday, January 25, 2010
  67. 67. Taxes and Efficiency Monday, January 25, 2010
  68. 68. Taxes and Efficiency uOne tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers. Monday, January 25, 2010
  69. 69. Taxes and Efficiency uOne tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers. uAn efficient tax system is one that imposes the smallest deadweight losses and administrative burdens possible. Monday, January 25, 2010
  70. 70. The Cost of Taxes to Taxpayers Monday, January 25, 2010
  71. 71. The Cost of Taxes to Taxpayers u The tax payment itself Monday, January 25, 2010
  72. 72. The Cost of Taxes to Taxpayers u The tax payment itself u Deadweight losses Monday, January 25, 2010
  73. 73. The Cost of Taxes to Taxpayers u The tax payment itself u Deadweight losses u Administrative burdens Monday, January 25, 2010
  74. 74. Deadweight Losses of Taxation Monday, January 25, 2010
  75. 75. Deadweight Losses of Taxation uBecause taxes distort incentives, they entail deadweight losses. Monday, January 25, 2010
  76. 76. Deadweight Losses of Taxation uBecause taxes distort incentives, they entail deadweight losses. uThe deadweight loss of a tax is the reduction of the economic well-being of taxpayers in excess of the amount of revenue raised by the government. Monday, January 25, 2010
  77. 77. Administrative Burdens Monday, January 25, 2010
  78. 78. Administrative Burdens Complying with tax laws creates additional deadweight losses. Monday, January 25, 2010
  79. 79. Administrative Burdens Complying with tax laws creates additional deadweight losses. uTaxpayers lose additional time and money documenting, computing, and avoiding taxes over and above the actual taxes they pay. Monday, January 25, 2010
  80. 80. Administrative Burdens Complying with tax laws creates additional deadweight losses. uTaxpayers lose additional time and money documenting, computing, and avoiding taxes over and above the actual taxes they pay. uThe administrative burden of any tax system is part of the inefficiency it creates. Monday, January 25, 2010
  81. 81. Marginal Tax Rates versus Average Tax Rates Monday, January 25, 2010
  82. 82. Marginal Tax Rates versus Average Tax Rates u The average tax rate is total taxes paid divided by total income. Monday, January 25, 2010
  83. 83. Marginal Tax Rates versus Average Tax Rates u The average tax rate is total taxes paid divided by total income. u The marginal tax rate is the extra taxes paid on an additional dollar of income. Monday, January 25, 2010
  84. 84. Lump-Sum Taxes Monday, January 25, 2010
  85. 85. Lump-Sum Taxes A lump-sum tax is a tax that is the same amount for every person, regardless of earnings or any actions that the person might take. Monday, January 25, 2010
  86. 86. Taxes and Equity Monday, January 25, 2010
  87. 87. Taxes and Equity u How should the burden of taxes be divided among the population? Monday, January 25, 2010
  88. 88. Taxes and Equity u How should the burden of taxes be divided among the population? u How do we evaluate whether a tax system is fair? Monday, January 25, 2010
  89. 89. Principles of Taxation $ Monday, January 25, 2010
  90. 90. Principles of Taxation u Benefits principle $ Monday, January 25, 2010
  91. 91. Principles of Taxation u Benefits principle u Ability-to-pay principle $ Monday, January 25, 2010
  92. 92. Benefits Principle Monday, January 25, 2010
  93. 93. Benefits Principle u The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services. Monday, January 25, 2010
  94. 94. Benefits Principle u The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services. u An example is a gasoline tax: Monday, January 25, 2010
  95. 95. Benefits Principle u The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services. u An example is a gasoline tax: u Tax revenues from a gasoline tax are used to finance our highway system. Monday, January 25, 2010
  96. 96. Benefits Principle u The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services. u An example is a gasoline tax: u Tax revenues from a gasoline tax are used to finance our highway system. u People who drive the most also pay the most toward maintaining roads. Monday, January 25, 2010
  97. 97. Ability-to-Pay Principle Monday, January 25, 2010
  98. 98. Ability-to-Pay Principle u The ability-to-pay principle is the idea that taxes should be levied on a person according to how well that person can shoulder the burden. Monday, January 25, 2010
  99. 99. Ability-to-Pay Principle u The ability-to-pay principle is the idea that taxes should be levied on a person according to how well that person can shoulder the burden. u The ability-to-pay principle leads to two corollary notions of equity. Monday, January 25, 2010
  100. 100. Ability-to-Pay Principle u The ability-to-pay principle is the idea that taxes should be levied on a person according to how well that person can shoulder the burden. u The ability-to-pay principle leads to two corollary notions of equity. u Vertical equity Monday, January 25, 2010
  101. 101. Ability-to-Pay Principle u The ability-to-pay principle is the idea that taxes should be levied on a person according to how well that person can shoulder the burden. u The ability-to-pay principle leads to two corollary notions of equity. u Vertical equity u Horizontal equity Monday, January 25, 2010
  102. 102. Vertical Equity Monday, January 25, 2010
  103. 103. Vertical Equity uVertical equity is the idea that taxpayers with a greater ability to pay taxes should pay larger amounts. Monday, January 25, 2010
  104. 104. Vertical Equity uVertical equity is the idea that taxpayers with a greater ability to pay taxes should pay larger amounts. u For example, people with higher incomes should pay more than people with lower incomes. Monday, January 25, 2010
  105. 105. Vertical Equity and Alternative Tax Systems Monday, January 25, 2010
  106. 106. Vertical Equity and Alternative Tax Systems uA proportional tax is one for which high- income and low-income taxpayers pay the same fraction of income. Monday, January 25, 2010
  107. 107. Vertical Equity and Alternative Tax Systems uA proportional tax is one for which high- income and low-income taxpayers pay the same fraction of income. uA regressive tax is one for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers. Monday, January 25, 2010
  108. 108. Vertical Equity and Alternative Tax Systems uA proportional tax is one for which high- income and low-income taxpayers pay the same fraction of income. uA regressive tax is one for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers. uA progressive tax is one for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers. Monday, January 25, 2010
  109. 109. Three Tax Systems Monday, January 25, 2010
  110. 110. The Burden of Federal Taxes Monday, January 25, 2010
  111. 111. The Burden of Federal Taxes Monday, January 25, 2010
  112. 112. Horizontal Equity Monday, January 25, 2010
  113. 113. Horizontal Equity uHorizontal equity is the idea that taxpayers with similar abilities to pay taxes should pay the same amounts. Monday, January 25, 2010
  114. 114. Horizontal Equity uHorizontal equity is the idea that taxpayers with similar abilities to pay taxes should pay the same amounts. uFor example, two families with the same number of dependents and the same income living in different parts of the country should pay the same federal taxes. Monday, January 25, 2010
  115. 115. The “Marriage Tax” Monday, January 25, 2010
  116. 116. The “Marriage Tax” u Marriage affects the tax liability of a couple in that tax law treats a married couple as a single taxpayer. Monday, January 25, 2010
  117. 117. The “Marriage Tax” u Marriage affects the tax liability of a couple in that tax law treats a married couple as a single taxpayer. u When a couple gets married, they stop paying taxes as individuals and start paying taxes as a family. Monday, January 25, 2010
  118. 118. The “Marriage Tax” u Marriage affects the tax liability of a couple in that tax law treats a married couple as a single taxpayer. u When a couple gets married, they stop paying taxes as individuals and start paying taxes as a family. u If each has a similar income, their total tax liability rises when they get married. Monday, January 25, 2010
  119. 119. Tax Incidence and Tax Equity Monday, January 25, 2010
  120. 120. Tax Incidence and Tax Equity u The difficulty in formulating tax policy is balancing the often conflicting goals of efficiency and equity. Monday, January 25, 2010
  121. 121. Tax Incidence and Tax Equity u The difficulty in formulating tax policy is balancing the often conflicting goals of efficiency and equity. u The study of who bears the burden of taxes is central to evaluating tax equity. Monday, January 25, 2010
  122. 122. Tax Incidence and Tax Equity u The difficulty in formulating tax policy is balancing the often conflicting goals of efficiency and equity. u The study of who bears the burden of taxes is central to evaluating tax equity. u This study is called tax incidence. Monday, January 25, 2010
  123. 123. Flypaper Theory of Tax Incidence According to the flypaper theory, the burden of a tax, like a fly on flypaper, sticks wherever it first lands. Monday, January 25, 2010
  124. 124. The Flat Tax Monday, January 25, 2010
  125. 125. The Flat Tax u First proposed by economist Robert Hall in the 1980s. Monday, January 25, 2010
  126. 126. The Flat Tax u First proposed by economist Robert Hall in the 1980s. u Proposed as an alternative to the current tax system. Monday, January 25, 2010
  127. 127. The Flat Tax u First proposed by economist Robert Hall in the 1980s. u Proposed as an alternative to the current tax system. u A single, low tax rate would apply to all income in the economy. Monday, January 25, 2010
  128. 128. Proposed Benefits of the Flat Tax Monday, January 25, 2010
  129. 129. Proposed Benefits of the Flat Tax u The flat tax would eliminate many of the deductions allowed under the current income tax thereby broadening the tax base and reducing marginal tax rates for most people. Monday, January 25, 2010
  130. 130. Proposed Benefits of the Flat Tax u The flat tax would eliminate many of the deductions allowed under the current income tax thereby broadening the tax base and reducing marginal tax rates for most people. u Because the flat tax is simple, the administrative burden of taxation would be greatly reduced. Monday, January 25, 2010
  131. 131. Proposed Benefits of the Flat Tax Monday, January 25, 2010
  132. 132. Proposed Benefits of the Flat Tax u Because all taxpayers would be faced with the same marginal tax rate, the tax could be collected at the source of income. Monday, January 25, 2010
  133. 133. Proposed Benefits of the Flat Tax u Because all taxpayers would be faced with the same marginal tax rate, the tax could be collected at the source of income. u The flat tax would replace both the personal and corporate income taxes and would eliminate the current double taxation of corporate profits. Monday, January 25, 2010
  134. 134. Proposed Benefits of the Flat Tax u Because all taxpayers would be faced with the same marginal tax rate, the tax could be collected at the source of income. u The flat tax would replace both the personal and corporate income taxes and would eliminate the current double taxation of corporate profits. u The flat tax could increase the incentive to save. Monday, January 25, 2010
  135. 135. Summary Monday, January 25, 2010
  136. 136. Summary u The U.S. government raises revenue using various taxes. Monday, January 25, 2010
  137. 137. Summary u The U.S. government raises revenue using various taxes. u Income taxes and payroll taxes raise the most revenue for the federal government. Monday, January 25, 2010
  138. 138. Summary u The U.S. government raises revenue using various taxes. u Income taxes and payroll taxes raise the most revenue for the federal government. u Sales taxes and property taxes raise the most revenue for the state and local governments. Monday, January 25, 2010
  139. 139. Summary Monday, January 25, 2010
  140. 140. Summary u Equity and efficiency are the two most important goals of the tax system. Monday, January 25, 2010
  141. 141. Summary u Equity and efficiency are the two most important goals of the tax system. u The efficiency of a tax system refers to the costs it imposes on the taxpayers. Monday, January 25, 2010
  142. 142. Summary u Equity and efficiency are the two most important goals of the tax system. u The efficiency of a tax system refers to the costs it imposes on the taxpayers. u The equity of a tax system concerns whether the tax burden is distributed fairly among the population. Monday, January 25, 2010
  143. 143. Summary Monday, January 25, 2010
  144. 144. Summary u According to the benefits principle, it is fair for people to pay taxes based on the benefits they receive from the government. Monday, January 25, 2010
  145. 145. Summary u According to the benefits principle, it is fair for people to pay taxes based on the benefits they receive from the government. u According to the ability-to-pay principle, it is fair for people to pay taxes on their capability to handle the financial burden. Monday, January 25, 2010
  146. 146. Summary Monday, January 25, 2010
  147. 147. Summary u The distribution of tax burdens is not the same as the distribution of tax bills. Monday, January 25, 2010
  148. 148. Summary u The distribution of tax burdens is not the same as the distribution of tax bills. u Much of the debate over tax policy arises because people give different weights to the two goals of efficiency and equity. Monday, January 25, 2010
  149. 149. Graphical Review Monday, January 25, 2010
  150. 150. “In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 100 Taxes paid in Ben Franklin’s time 80 accounted for 5 60 percent of the 40 average American’s 20 income. 0 1789 Monday, January 25, 2010
  151. 151. “In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 100 Today, taxes 80 account for up 60 to a third of the average 40 American’s 20 income. 0 1789 Today Monday, January 25, 2010
  152. 152. Government Revenue as a Percentage of GDP Monday, January 25, 2010
  153. 153. Receipts of the Federal Government... Individual Income Tax, 48% Social Insurance Tax, 34% Corporate Tax, 10% Excise Tax, 4% Other, 4% Monday, January 25, 2010
  154. 154. Federal Government Spending: 1999... Social Security, 23% Defense, 16% Net Interest, 13% Income security, 14% Medicare, 12% Health, 8% Other, 14%, Monday, January 25, 2010

×