Copyright © 2002 by Thomson Learning, Inc. Chapter 10 Introduction to Government Finance Copyright...

Copyright © 2002 by Thomson Learning, Inc.

Chapter 10

Introduction to Government Finance

Copyright © 2002 Thomson Learning, Inc. Thomson Learning™ is a trademark used herein under license.

ALL RIGHTS RESERVED. Instructors of classes adopting PUBLIC FINANCE: A CONTEMPORARY APPLICATION OF THEORY TO POLICY, Seventh Edition by David N. Hyman as an assigned textbook may reproduce material from this publication for classroom

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systems—without the written permission of the publisher. Printed in the United States of America

ISBN 0-03-033652-X


Plan

Présentation d’un système d’imposition Critères d’évaluation d’un système d’impôt Alternatives à l’impôt


Federal, State, and Local Revenue

Sources: Taxes:

Payroll Income (Corporate and Personal) Property Sales and Excise Estate Tariffs

Fees Tuition Licenses

$2.5 trillion


Determinants of How Much We Are Taxed

Political Equilibrium Market Equilibrium and Its Efficiency The Distribution of Income


Taxes

Taxes are compulsory payments to government


Tax Basics Tax Base

The item or the activity that is to be taxed. Tax Rate Structure

The relationship between the amount that is to be paid in tax and the tax base for a given accounting period.

Average Tax Rate The total amount of tax divided by the total amount of the tax base.

Marginal Tax Rate The amount by which the tax increases when the tax base increases.

Tax bracket The range of the tax base in which the marginal rate is constant.


Descriptors of the Tax Rate Structure

A Progressive Tax has a structure where the marginal tax rate is increasing and greater than the average tax rate.

A Proportional Tax has a structure where the marginal tax rate is constant and equal to the average tax rate.

A Regressive Tax has a structure where the marginal tax rate is decreasing and less than the average tax rate.


Figure 10.1 A Proportional Tax Rate Structure

Ta

x R

ate

(P

erc

en

t)

Tax Base (Dollars per Year) 0

t ATR = MTR


Figure 10.2 A Progressive Tax Rate StructureT

ax

Ra

te (

Pe

rce

nt)

Tax Base (Dollars of Taxable Income per Year)

0

35

25

15

MTR

ATR

4,000 29,000 70,000


Figure 10.3 An Example of a Regressive Tax Structure

Ta

x R

ate

(P

erc

en

t)

Annual Labor Earnings per Worker

0

15.30

12.35

2.9

$100,000 MTR

ATR

$76,200


Average Tax Rates

Tax Brackets(Taxable Income)

Marginal Tax Rates (MTR)

Beginning of Bracket

End of Bracket

0-$4,000 0 0 0

$4000-$29,000 15 0 11

$29,000-$70,000 25 13 20

Above $70,000 35 20 34*

Average Tax Rates in the US


Average Tax Rates Throughout the World

0

60

50

40

30

20

10 Ta

x R

eve

nu

es

as

a P

erc

en

t o

f G

DP

De

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ark

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we

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Cze

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ep

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Fin

lan

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the

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xem

bo

urg

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ran

ce

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lan

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Au

stri

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Gre

ece

*

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ly

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ain

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ited

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itze

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rea

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co


How Should the Burden of Government Be Financed

Benefit Principle Those that benefit the most from a

particular program should pay the most for that program (Lindahl Tax principle at work).

Ability-to-Pay Principle Those who have the greatest ability to pay

should be required to pay the most.


Criteria for Evaluating Alternative Methods of Government Finance

Equity The distribution of the burden of government finance should

coincide with commonly held notions of fairness and ability-to-pay.

Efficiency The system of government finance should raise revenues

with only a minimal loss in efficiency in the private sector. Administrative ease

A government finance system should be relatively easy to administer in a consistent manner without excessive costs to collect, enforce, and comply with taxes and tax laws.


Tax Compliance and Evasion

Tax Evasion is the term for illegal ways of avoiding paying taxes. It is typically the result of not declaring income or overstating otherwise legal deductions.

Tax Avoidance is the term for the legal ways of avoiding paying taxes, typically the result of avoiding activities that are taxed, delaying the time in which taxes are owed, or taking an action designed to lower a tax burden.


Figure 10.4 Reducing Tax Evasion

Cos

t and

Ben

efit

Unreported Income per Year (Dollars)

0 D* 1

B

MC

MB2

D*

A

MC

MB = MTR

Cos

t and

Ben

efit


0

MC2 C

MC1

Cos

t and

Ben

efit


0

MB = MTR

E

1 E

E 2

E

E1

MB1 = MTR1

D* 2

D* 1

D* 2


Alternatives to Taxation

Debt Finance is the means of financing expenditures through the issuing of bonds.

Inflationary Finance is the means of financing expenditures through the printing of money.


Figure 10.5 Inflationary Finance

Gu

ns

pe

r Y

ea

r

Butter per Year 0 B2

G2

G1

C I

A

T' B1

T


More alternatives to Taxation Donations

Money (but more usually time) is voluntarily given to government. Military service or work in the Peace Corps can be considered a donation when the compensation is less than the market value of the time.

User Charges Payments by users of the government service can be

expected. Examples include tuition, fees paid to enter state parks, greens fees at publicly owned golf courses.

Earmarked Taxes Taxes can be implemented to fund specific public goods.

Examples include gasoline taxes and tolls designed to fund road and bridge repair.


Figure 10.6 User Charges and Efficiency

Ch

arg

es

Trash Pickups per Year 0 Q*

C*

C* + S*

MSB = MPB + MEB

MPB

MSC

S*

Z*

Z


Figure 10.7 User Charges for a Congestible Government-Supplied Service

Us

er

Ch

arg

es

(C

en

ts p

er

Mile

)

Vehicles per Mile per Hour

0

E1

20

E2

D2 = MSB2 D1 = MSB1 MSC

80 100 120 150

E*

N*


Government Enterprise

Local Utilities Lotteries


User Charges and Efficiency

Roads and Bridges wear out when too much weight is concentrated on too few axles.

Tolls motivate the wrong behavior in that they tax per axle rather than on pounds per axle.

Estimates suggest that taxing pounds per axle and using the revenue to repair roads to a greater strength would pay for itself more than eight-fold.


State Lotteries

State Lotteries account for more than 3% of state revenues.

Evidence suggests that the lottery system is a regressive means of creating government revenue.

Copyright © 2002 by Thomson Learning, Inc. Chapter 10 Introduction to Government Finance Copyright...

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