PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe

12CHAPTER

Taxes on Economic Taxes on Economic TransactionsTransactions

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Excise Taxes, Unit Taxes, Excise Taxes, Unit Taxes, Ad Valorem TaxesAd Valorem Taxes

Excise tax Excise tax Placed on sale of specific good/servicePlaced on sale of specific good/service

Unit tax Unit tax Certain amount per unit of good soldCertain amount per unit of good sold

Ad valorem tax Ad valorem tax Fixed percentage of value of taxed Fixed percentage of value of taxed

goodsgoods

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Unit Taxes Versus Ad Unit Taxes Versus Ad Valorem TaxesValorem Taxes

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Unit Taxes Versus Ad Unit Taxes Versus Ad Valorem TaxesValorem Taxes

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Unit Taxes versus Ad Unit Taxes versus Ad Valorem TaxesValorem Taxes

Fluctuation in price of goodFluctuation in price of good Amount per unit from unit tax Amount per unit from unit tax

unchangedunchanged Amount per unit from ad valorem tax Amount per unit from ad valorem tax

fluctuatesfluctuates

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Unit Taxes and Ad Unit Taxes and Ad Valorem TaxesValorem Taxes

Advantages of unit taxes Advantages of unit taxes Amount of tax not affected by price of goodAmount of tax not affected by price of good

Disadvantages Disadvantages Favor expensive unitsFavor expensive units Inflation can have adverse effect on real taxInflation can have adverse effect on real tax

Advantages of ad valorem taxesAdvantages of ad valorem taxes Unaffected in real terms by inflationUnaffected in real terms by inflation

Disadvantages Disadvantages Less appropriate when value of a good cannot Less appropriate when value of a good cannot

be easily determinedbe easily determined

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Revenues from Excise Revenues from Excise TaxesTaxes

Small source of government revenueSmall source of government revenue Closely related to user charges at Closely related to user charges at

federal levelfederal level

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

User Charges and User Charges and EfficiencyEfficiency

Minimize excess burden of taxationMinimize excess burden of taxation Acts as price for public sector outputActs as price for public sector output Acts as rationing deviceActs as rationing device May be desirable even when May be desirable even when

marginal cost is zeromarginal cost is zero

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

User Charges and User Charges and Demand RevelationDemand Revelation

Allow producers to gauge consumer Allow producers to gauge consumer demanddemand

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

User Charges and EquityUser Charges and Equity

Satisfy benefit principle of taxationSatisfy benefit principle of taxation Disadvantages: redistributional Disadvantages: redistributional

programsprograms Difficult to determine who benefits and Difficult to determine who benefits and

how benefits are sharedhow benefits are shared Costly to charge user fees because of Costly to charge user fees because of

non-excludability non-excludability

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Approximating User Approximating User Charges in the Real Charges in the Real

WorldWorld User charges may be difficult to User charges may be difficult to

approximateapproximate User Charges as TaxesUser Charges as Taxes

Similar to market pricesSimilar to market prices Are among most effective and fair Are among most effective and fair

methods of taxation when feasiblemethods of taxation when feasible

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

User Charges and Public User Charges and Public EnterpriseEnterprise

Output can be provided more Output can be provided more efficiently when user fees employed efficiently when user fees employed as method of taxationas method of taxation

Revenues and User FeesRevenues and User Fees Makes up substantial amount of state Makes up substantial amount of state

and local government revenuesand local government revenues

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Import and Export TaxesImport and Export Taxes

Import duty (tariff) – tax levied on Import duty (tariff) – tax levied on imported goodsimported goods

Easy transactions to monitor and Easy transactions to monitor and collectcollect

Important source of revenue for less Important source of revenue for less developed countriesdeveloped countries

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Import Taxes and Trade Import Taxes and Trade RestrictionsRestrictions

Used in developed countries to Used in developed countries to discourage importsdiscourage imports

Trade barriers politically produced Trade barriers politically produced protection for domestic industriesprotection for domestic industries

Reduction of trade barriers would Reduction of trade barriers would increase value of total world outputincrease value of total world output

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

QuotasQuotas

Law restricting quantity of good that Law restricting quantity of good that can be importedcan be imported

No tax is collectedNo tax is collected Less beneficial than a tariff to publicLess beneficial than a tariff to public More beneficial to interest groupsMore beneficial to interest groups

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Effects of Quotas and Effects of Quotas and TariffsTariffs

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Trade AgreementsTrade Agreements

Established to keep trade barriers Established to keep trade barriers lowlow

Countries agree not to subsidize Countries agree not to subsidize exporting industriesexporting industries

GATT, WTO, EU, NAFTAGATT, WTO, EU, NAFTA

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

General Sales TaxesGeneral Sales Taxes

Ad Valorem tax on all retail salesAd Valorem tax on all retail sales Effects similar to an excise taxEffects similar to an excise tax

Restricts level of outputRestricts level of output Raises pricesRaises prices

Approximates tax on taxpayer’s level Approximates tax on taxpayer’s level of consumptionof consumption

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Is the Sales Tax Is the Sales Tax Regressive?Regressive?

Often viewed as regressive with Often viewed as regressive with respect to incomerespect to income

Should consider income over life Should consider income over life cyclecycle

Sales Taxes and the InternetSales Taxes and the Internet Cannot tax internet accessCannot tax internet access Fear that internet will lead to decline in Fear that internet will lead to decline in

state sales tax revenuesstate sales tax revenues Streamlined Sales Tax ProjectStreamlined Sales Tax Project

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Income and Substitution Income and Substitution EffectsEffects

Substitution effect Substitution effect Increased relative price causes Increased relative price causes

substitution from one good to anothersubstitution from one good to another Income effect Income effect

Effect of lowering an individual’s incomeEffect of lowering an individual’s income

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Possible Effects of a Possible Effects of a Consumption TaxConsumption Tax

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Turnover TaxesTurnover Taxes

Paid as fixed percentage of value of Paid as fixed percentage of value of transactiontransaction

Taxes all transactionsTaxes all transactions Inefficient, discourages transactionsInefficient, discourages transactions Encourages vertical integrationEncourages vertical integration

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Value Added Tax (VAT)Value Added Tax (VAT)

Tax on value added by each Tax on value added by each producer in economyproducer in economy

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

VAT versus Sales TaxVAT versus Sales Tax

VAT VAT Levied on suppliersLevied on suppliers No need to distinguish between retail No need to distinguish between retail

and wholesale purchasersand wholesale purchasers Sales taxSales tax

Levied on demandersLevied on demanders Easier to collectEasier to collect Easier to calculateEasier to calculate

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Value Added Tax in Value Added Tax in European UnionEuropean Union

European Community nations use a European Community nations use a VAT as major source of revenueVAT as major source of revenue

Taxes on goods and services are Taxes on goods and services are heavier than in the U.S.heavier than in the U.S.

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Visibility of the TaxVisibility of the Tax

More difficult to evade a VATMore difficult to evade a VAT Taxpayers may be less resistant to Taxpayers may be less resistant to

paying the taxpaying the tax May be politically more popular than May be politically more popular than

a sales tax because its effects are a sales tax because its effects are more likely to be misunderstoodmore likely to be misunderstood