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Theory
Public Economics
Public Revenues
In general, public revenue may be considered to
include any revenue flowing to the public budgets.
Among those public budgets there may be budgets
of governments, lower regional administration units
(districts and municipalities), parafiscal funds and
also budgets of health insurance funds. The most
substantial item on the revenue side of public
budgets are taxes. It further contains non-tax
public revenue (interest revenue, fees and fines,
and revenue from selling and renting out state or
municipal property).
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A tax is
a payment in money
required by a government
that is unrelated to any specific benefit
or service received from the government.
imposed by a government
not tied directly to the benefit received by
the taxpayer.
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Sources of finance
Tax = MAIN SOURCE
User charges
Prices charged for the delivery of certain public goods
and services
Examples: Toll roads, public swimming pools
Administrative fees
Definition of service/benefit is broad & imprecise
Examples: TV licences, parking tickets
Borrowing
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Tax Principles
Economists believe that any broad-based tax should possess
five characteristics:
(1)
Ease of collection
(2)
Ease of compliance
(3)
Flexibility
(4)
(5)
Tax Principles
(1) Ease of Collection and
(2) Ease of Compliance
To successfully implement a tax policy, it is necessary
to incur the costs associated with administering and
enforcing it
Given that society must incur these costs, it wants to
get the most possible revenue at the least possible
cost
Requires that individuals be able to calculate tax bills
fairly easily and that it be difficult for individuals to
hide information on taxable assets
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Tax Principles
(3) Flexibility
- Tax policy is a primary tool of macroeconomic policy (i.e.
economic stabilization)
- To be able to respond quickly to address potential
difficulties in the economy, tax authorities must be able to
change tax liabilities easily and quickly and those
changes must quickly be felt throughout the economy
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Tax Principles
(3) Flexibility (II)
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Tax Principles
(4) Economic Efficiency
Individuals must face same prices for economy to reach
Pareto-optimal outcome
Broad-based taxes are distorting (i.e. drive wedge between
price paid by consumer and prices kept by firms) so they
violate this property
The goal then is to design a tax that introduces the least
distortion and keeps society as close to the Paretooptimal outcome as possible
(5) End-Results Equity
Tax policy is designed to work with redistribution programs to
achieve this goal
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An excise tax
Tax on the sale of a single product (e.g. gasoline,
alcohol, cigarettes)
Designed to reduce consumption of good
(5) A property tax
Tax on value of items of wealth usually residential,
commercial and industrial properties
Levied on owner of property
Value assessed periodically by tax authorities
(6) A value-added tax
Tax on value added of firms (which is the difference
between sales revenue and input purchases)
Levied on firms
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Dates from Adam Smith and John Stuart Mill in late 1700s
and early 1800s
Holds that people must be willing to sacrifice for the public
good
Gave rise to view of taxes as necessary evil
Key question: How to determine what people should
sacrifice?
Two potential approaches based on ability to pay
- Horizontal Equity: Two people deemed equal in
every relevant economic dimension should pay
same tax
- Vertical Equity: It is permissible to tax unequals
unequally
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Uses of income
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Horizontal Equity:
The Ideal Tax Base (OBLIGATORY)
Musgraves view of horizontal equity
Argues that questioning whether income or consumption tax is
better is the wrong question
Instead, believes that horizontal equity should only consider
whether taxes discriminated against people in inappropriate ways
Either income or consumption tax is appropriate surrogate for
utility so long as people are not treated differently based on
gender, race, religion, etc.
Society should just accept one type of tax and then worry
more about the specific tax structure (i.e. vertical equity)
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Vertical Equity
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Progressive tax
Larger percentage of income as income rises
Regressive tax
Smaller percentage of income as income rises
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Measuring of Consequences of
Taxation to Income Distribution I.
Lorenz Curve
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Measuring of Consequences of
Taxation to Income Distribution II.
Ginis Coefficient
Measuring of Consequences of
Taxation to Income Distribution III.
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Tax Incidence
Two main concepts of how a tax is
distributed:
Statutory incidence who is legally
responsible for tax
Economic incidence the true change in the
distribution of income induced by tax.
These two concepts differ because of tax
shifting.
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v1
T1
I1
T0
I0
I1 I 0
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% T
v2
% I
T1 T 0
T0
I1 I 0
I0
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Figure 1
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Figure 2
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Figure 3
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Figure 4
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Figure 5
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Figure 6
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Figure 7
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Tax Efficiency I.
Administrative Efficiency costs of tax
collection, salaries of financial officers, tax
forms, time spent fulfilling forms, cost of tax
advisors etc.
Direct costs costs for the state
Indirect costs costs for the taxpayers
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Tax
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Implications of Figuers
Higher (compensated) elasticities lead to
larger excess burden
Excess burden increases with the square of
the tax rate
The greater the initial expenditure on the taxed
commodity, the larger the excess burden
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