101 lecture 12

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101 lecture 12

  1. 1. Microeconomics Lecture 12 ! Tax Systems
  2. 2. 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
  3. 3. Tax System Two Objectives: Efficient and Equitable Lower costs and fair
  4. 4. Avoid deadweight loss administrative burdens ! Efficient? low deadweight loss and low administrative burdens
  5. 5. Efficient? low deadweight loss and low administrative burdens
  6. 6. Administrative Burden It costs time and money to collect taxes
  7. 7. 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
  8. 8. Incentives taxes distort change behavior !
  9. 9. Type of Taxes Income - Earn Consumption - Spend
  10. 10. Are Taxes Fair? Benefits ! Ability to Pay
  11. 11. Benefits You should pay for the benefits you receive !
  12. 12. Ability If you are able you should pay more
  13. 13. Tradeoffs Fair or Efficient?
  14. 14. Income Tax Rates Lump-Sum Proportional Progressive Regressive
  15. 15. Lump Sum Pay a fixed amount regardless of income
  16. 16. Proportional Pay a fixed rate regardless of income
  17. 17. Progressive Pay an increasing rate as income increases
  18. 18. Regressive Pay a decreasing rate as income increases
  19. 19. Rates Average Marginal
  20. 20. Average total taxes divided by income
  21. 21. Marginal extra tax on the next riyal of income
  22. 22. Marginal 10% on first 100 30% on the next 100 then 50% above
  23. 23. 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
  24. 24. 100 75 50 25 0 First 100 Second 100 Third 100
  25. 25. Incentives Matter Change the rates ! Change behavior
  26. 26. Art Laffer Laffer Curve
  27. 27. 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%
  28. 28. 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

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