Transcript Unit Taxes and Ad Valorem Taxes

CHAPTER
12
Taxes on Economic
Transactions
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Excise Taxes, Unit Taxes, Ad
Valorem Taxes

Excise tax
 Placed

on sale of specific good/service
Unit tax
 Certain

amount per unit of good sold
Ad valorem tax
 Fixed
percentage of value of taxed goods
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Unit Taxes Versus Ad Valorem
Taxes
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Unit Taxes Versus Ad Valorem
Taxes
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Unit Taxes versus Ad Valorem
Taxes

Fluctuation in price of good
 Amount
per unit from unit tax unchanged
 Amount
per unit from ad valorem tax
fluctuates
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Unit Taxes and Ad Valorem
Taxes

Advantages of unit taxes


Disadvantages



Favor expensive units
Inflation can have adverse effect on real tax
Advantages of ad valorem taxes


Amount of tax not affected by price of good
Unaffected in real terms by inflation
Disadvantages

Less appropriate when value of a good cannot be
easily determined
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Revenues from Excise Taxes
Small source of government revenue
 Closely related to user charges at federal
level

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
User Charges and Efficiency
Minimize excess burden of taxation
 Acts as price for public sector output
 Acts as rationing device
 May be desirable even when marginal
cost is zero

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
User Charges and Demand
Revelation

Allow producers to gauge consumer
demand
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
User Charges and Equity
Satisfy benefit principle of taxation
 Disadvantages: redistributional programs

 Difficult
to determine who benefits and how
benefits are shared
 Costly to charge user fees because of nonexcludability
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Approximating User Charges
in the Real World
User charges may be difficult to
approximate
 User Charges as Taxes

 Similar
to market prices
 Are among most effective and fair methods
of taxation when feasible
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
User Charges and Public
Enterprise
Output can be provided more efficiently
when user fees employed as method of
taxation
 Revenues and User Fees

 Makes
up substantial amount of state and
local government revenues
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Import and Export Taxes
Import duty (tariff) – tax levied on
imported goods
 Easy transactions to monitor and collect
 Important source of revenue for less
developed countries

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Import Taxes and Trade
Restrictions
Used in developed countries to
discourage imports
 Trade barriers politically produced
protection for domestic industries
 Reduction of trade barriers would
increase value of total world output

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Quotas
Law restricting quantity of good that can
be imported
 No tax is collected
 Less beneficial than a tariff to public
 More beneficial to interest groups

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Effects of Quotas and Tariffs
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Trade Agreements
Established to keep trade barriers low
 Countries agree not to subsidize
exporting industries
 GATT, WTO, EU, NAFTA

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
General Sales Taxes
Ad Valorem tax on all retail sales
 Effects similar to an excise tax

 Restricts
level of output
 Raises prices

Approximates tax on taxpayer’s level of
consumption
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Is the Sales Tax Regressive?
Often viewed as regressive with respect
to income
 Should consider income over life cycle
 Sales Taxes and the Internet

 Cannot
tax internet access
 Fear that internet will lead to decline in
state sales tax revenues
 Streamlined Sales Tax Project
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Income and Substitution
Effects

Substitution effect
 Increased
relative price causes substitution
from one good to another

Income effect
 Effect
of lowering an individual’s income
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Possible Effects of a
Consumption Tax
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Turnover Taxes
Paid as fixed percentage of value of
transaction
 Taxes all transactions
 Inefficient, discourages transactions
 Encourages vertical integration

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Value Added Tax (VAT)

Tax on value added by each producer in
economy
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
VAT versus Sales Tax

VAT
 Levied
on suppliers
 No need to distinguish between retail and
wholesale purchasers

Sales tax
 Levied
on demanders
 Easier to collect
 Easier to calculate
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Value Added Tax in European
Union
European Community nations use a VAT as
major source of revenue
 Taxes on goods and services are heavier
than in the U.S.

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Visibility of the Tax
More difficult to evade a VAT
 Taxpayers may be less resistant to paying
the tax
 May be politically more popular than a
sales tax because its effects are more
likely to be misunderstood

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe