The document discusses government spending and taxation at different levels of government. It notes that combined US government spending totaled over $6 trillion in 2012, with the federal government spending coming primarily from taxes and borrowing. It then explores concepts of tax burden and how taxes can be progressive, proportional, or regressive depending on how the tax rate relates to income. Specific examples of taxes at different levels are provided, noting how some like sales tax are often regressive in that they take a larger percentage from lower-income individuals than higher income individuals. The importance of considering who pays the tax burden when evaluating new taxes is emphasized.

1. Public Finance and Public Choice
In this world, nothing can be said to
be certain except death and taxes.
-Benjamin Franklin
Slide 1 of 25

2. Government spending comes
from several levels
Federal State Local
$ = $100 billion
$$$$$$$$$$
$$$$$$$$$$
$$$$$$$$$$
$$$$$
$$$$$$$$$$
$$$$$$$$$$
$$$$$$$$$$
$$$$
$3.5 trillion $2.0 trillion $1.3 trillion
How much did our government
spend in 2012?
Slide 2 of 25

3. U.S. Government spending is an
enormous force
Combined, U.S.
government
spending (at all
levels) totaled
more than $6
trillion in 2012.
To put that figure in
perspective, that is more
than every dollar earned by
every resident in China
So where does it all come from?
Slide 3 of 25

4. Tax revenue
For the Federal government, it
primarily comes from taxes and
from borrowing.
Federal taxes will generate a little
more than $2 trillion this year.
The rest of the money will be
borrowed through the sale of
bonds.
Slide 4 of 25

5. We’ve borrowed a lot!
Here, we see the U.S.
Federal Government’s
spending (in red) and
revenue (in blue).
Any time the blue line is
higher than the red line, that
means our government is
running a surplus…i.e. saving
money.
Clearly that has not been
happening lately. Total U.S.
government debt exceeded
$15 trillion in 2012.
Slide 5 of 25

6. Funding government programs
Let’s turn our attention to taxes….
who pays them?
Slide 6 of 25

7. Government programs are funded (in
part) through taxes and fees
How does a government determine who
pays the taxes and fees?
Determining who pays gets at the idea
of tax burden, a concept we’ll explore
on the next few slides.
Who should carry the burden?
Slide 7 of 25

8. What is tax burden?
Tax Burden - Taxes collected in an area divided by
Total Income in that area.
High taxes in a low
income area results in
a high tax burden.
Low taxes in a high
income area results in
a low tax burden.
Slide 8 of 25

9. How is the State and Local
tax burden in Virginia?
Virginia Ranks 41st
In Maine, 13% of
income is paid to
state and local
taxes!
In Alaska, state and
local tax burdens
are very low.
Residents receive
tax rebates from oil
revenues!
People routinely complain
about how high the state
and local taxes are in
Virginia.
Those complaints are not
justified!
What do you think:
Are State and Local taxes high or low in Virginia?
In other words, is our
burden heavy or light?
Slide 9 of 25

10. So how should burdens be distributed?
There are two schools of thought:
People should pay
based on the benefits
they receive
People should pay
based on their
incomes
Benefits-received
principal
Ability-to-pay
principal
Examples
include income
and payroll
taxes.
Examples
include gas
taxes and tolls.
Slide 10 of 25

11. The benefits received principle
• These taxes are referred to as “user taxes”
– Like a toll road, only people that use the service pay.
• These taxes are good for some applications
– Gas Tax
– Pollution Tax
– Congestion Tax
• They are not good for other applications
– National defense
– Police and fire protection
How can you value the benefit of
national defense or public safety?
Gas taxes are used to pay for road construction.
Shouldn’t those that drive be those that pay?
Slide 11 of 25

12. The ability to pay principal
• Proponents believe tax burdens should be
disproportionately heavy on higher income
households and business
• This principal can be problematic
– There is not a good way to measure ability to pay
– Should households pay equal percentages of income?
This idea refers to tax regressivity
and progressivity (See next slide).
Why? Because each additional dollar of
income yields less marginal utility.
Slide 12 of 25

13. Progressive, proportional,
and regressive taxes
All taxes are classified into one of these
three categories based on the relationship
between tax rates and taxpayers’ income.
Slide 13 of 25

14. Let’s evaluate three taxes to see if they are
Progressive, proportional, or regressive
Household A
Income = $30,000/yr
Household B
Income = $100,000/yr
Assume a government
wants to provide a
public good.
Household A
Pays $5,000 or 18%
Household B
Pays $5,000 or 5%
This tax is
regressive!
The government
proposes three taxes
to pay for it.
Tax Proposal #1:
Each house pays
$5,000/yr
Slide 14 of 25

15. Let’s evaluate three taxes to see if they are
Progressive, proportional, or regressive
Household A
Income = $30,000/yr
Household B
Income = $100,000/yr
Tax Proposal #2:
Each house pays 5%
of first $20,000 and
7% of all income
above $20,000
Household A
Pays $1,700 or 5.7%
Household B
Pays $6,600 or 6.6%
This tax is
progressive!
Slide 15 of 25

16. Let’s evaluate three taxes to see if they are
Progressive, proportional, or regressive
Household A
Income = $30,000/yr
Household B
Income = $100,000/yr
Tax Proposal #3:
Each house pays
10% of total income.
Household A
Pays $3,000 or 10%
Household B
Pays $10,000 or 10%
This tax is
proportional!
Slide 16 of 25

17. Example of a Progressive tax:
Federal income tax
Do you ever
wonder why
the schedule
for federal
income tax is
so confusing?
Household A
Income = $34,625/yr
Income tax=$4,439
Tax rate =12.8%
Household B
Income = $126,761/yr
Income Tax = $24,897
Tax rate =19.6%
Federal
Income tax
is
Progressive!
The schedule
ensures that
this tax
remains
progressive!
Slide 17 of 25

18. Example of a regressive tax:
Virginia’s sales tax
Household A
Income = $34,625/yr
Retail Expenditures = $25,420
Sales tax costs = $1,271
Tax rate =3.7%
Household B
Income = $126,761/yr
Retail Expenditures = $60,250
Sales tax costs = $3,013
Tax rate =2.4%
Virginia’s sales tax rate is 5%.
At first glance, this looks proportional.
Sales tax is
regressive!
Slide 18 of 25

19. Many taxes are regressive
• Payroll taxes - regressive
– These taxes are only applied to a fixed
amount of income
• Social Security and Medicaid taxes are levied
only on first $87,000 of income
• Property taxes - regressive
– Taxes are higher as a percent of income
• In some cases rates are increased in poorer
areas to make up for declining revenues
making those taxes more regressive
Slide 19 of 25

20. Evaluate any new tax!
Unfortunately, the sales tax seems
to be the tax of choice for financing
many new government projects.
During the course of your life, your state
and local government will ask you to vote
on many projects.
I encourage you to evaluate the
funding source carefully.
As a regressive tax, sales tax places
more burden on low income households.
For example, it might seem unfair to
use sales tax to finance a basketball
arena that may only be attended by
high income households.
Slide 20 of 25

21. Keep in mind that determining who pays
a tax can be tough
D
S
In this market,
equilibrium price will be
$700 and quantity will
be 16 units.
However, if a $200 per
unit tax is levied,
supply will shift to the
left.
Price will rise, and
quantity will fall
Note how price has
only increased by
$100.
Some ($100) of the tax
is being paid by the
consumer
The rest, is being paid
by the producer.
This idea of
determining who pays
is referred to as the
“Incidence of tax”
Slide 21 of 25

22. Keep in mind that determining who pays
a tax can be tough.
D
S
Notice though – with a
far more elastic
demand curve, the
incidence of taxation
falls more on the
producer.
Here the purple box
(share of taxes paid by
the producer) is far
bigger than the red box
(share of taxes paid by
the consumer)
This should make
sense. With elastic
demand, consumers
are willing to go without
given a higher price.
Therefore, the tax falls
on the producer.
Slide 22 of 25

23. Keep in mind that determining who pays
a tax can be tough.
D
S
The opposite is true
with an inelastic
demand.
Here the purple box
(share of taxes paid by
the producer) is far
SMALLER than the red
box (share of taxes
paid by the consumer)
Again, this should
make sense. With
inelastic demand,
consumers have to
have this good. A tax
will largely be “passed
on” to the consumer.
Slide 23 of 25

24. In Summary
Some of the money that a government
spends is used to correct for market
failure.
Some of that money comes from taxes
(and fees) with the rest coming from
borrowing.
However the burdens of those taxes are
not carried equally by all.
As a voter, you should consider these
burdens carefully when analyzing a newly
proposed tax change!
Slide 24 of 28

25. Credits
Slide 4: http://en.wikipedia.org/wiki/File:Capitol_Building_Full_View.jpg
Slide 6: http://www.flickr.com/photos/safari_vacation/7220861734/
Slide 7:
http://commons.wikimedia.org/wiki/File:StateLibQld_2_102489_Sugar_cane_worker_carrying_a_bundle_of_cut_can
e_at_Nambour,_Queensland,_1938.jpg
Slide 10: http://www.flickr.com/photos/donkeyhotey/6263542143/
Slide 11: http://commons.wikimedia.org/wiki/File:Shuto_expressway_oi_toll_booth.jpg
Slide 19: http://www.flickr.com/photos/68751915@N05/6757828303/
Slide 20: http://commons.wikimedia.org/wiki/File:London_Olympics_2012_Basketball_Arena.jpg
Slide 25 of 25