Public Finance and Public Choice
-
Upload
lumen-learning -
Category
Education
-
view
149 -
download
5
Transcript of Public Finance and Public Choice
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
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
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
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
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
Funding government programs
Let’s turn our attention to taxes….
who pays them?
Slide 6 of 25
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
$200 tax
This idea of determining who pays is referred to as the “Incidence of tax”
Slide 21 of 25
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)
$200 tax
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
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)
$200 tax
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
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
Credits
Slide 4: http://en.wikipedia.org/wiki/File:Capitol_Building_Full_View.jpgSlide 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_cane_at_Nambour,_Queensland,_1938.jpgSlide 10: http://www.flickr.com/photos/donkeyhotey/6263542143/Slide 11: http://commons.wikimedia.org/wiki/File:Shuto_expressway_oi_toll_booth.jpgSlide 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