Transcript Unit 3: Macroeconomics: Institutions Lecture #2: Sources of

UNIT 3: MACROECONOMICS:
INSTITUTIONS
LECTURE #2: SOURCES OF
GOVERNMENT REVENUE
KEY TERMS:
Sin tax
 Tax loophole
 Sales tax
 Proportional tax
 Progressive tax
 Marginal tax rate
 Regressive tax

OBJECTIVE(S):
Students will be able to explain the economic
impact of taxes
 List three criteria for effective taxes
 Understand the two primary principles of
taxation
 Understand how taxes are classified

I. ECONOMIC IMPACT OF TAXES

A. Resource Allocation

1. Taxes have an affect on the cost of production

Ex: Tax on a good or service raises cost of production thus
shifting the supply curve in what direction?
 To the LEFT Thus ? If demand remains unchanged?


Price will increase (how do people usually react?)
• They Buy less
Ex: Congress enacted Luxury Tax (1991) on expensive items
to raise taxes on Rich but these products were elastic so?
 Price went up and drove demand down thus lead to much
unemployment in those sectors of the economy
I. ECONOMIC IMPACT OF TAXES

B. Behavior Adjustment

1. Taxes often used to encourage or discourage
certain types of activities
Ex: tax deduction allowed on home interest loans (what is
this meant to encourage)
 Home Ownership
 Ex: No Tax deduction for credit card interest rates
 Discourage use of credit cards’


2. Sin Tax – a relatively high tax designed to raise
revenue and reduce consumption of some undesirable
product like alcohol or tobacco

Tobacco seems to be inelastic in U.S. , why?
 Addictive behavior
I. ECONOMIC IMPACT OF TAXES

C. Productivity and Growth


1. Some people today think taxes are too high and
that it affects their incentive to work
D. Incidence of Tax
1. The final burden of the tax
 2. the more elastic the demand = the greater the
portion of the tax that will be absorbed by the
producer
 3. The more inelastic demand – the greater the
portion of the tax will be absorbed by the consumer.

II. CRITERIA FOR EFFECTIVE TAXES

A. The 3 criteria for taxes to be effective

1. Equity (Fairness):


What is seem as unfair are loopholes (exceptions or
oversights in the tax law that allow some people and
business to avoid paying taxes)
2. Simplicity – have to be understood by all
Individual income tax – most people hate them because
they are hard to understand.
 Sales Tax – This is simple and understandable everyone
pays


3. Efficiency – easy to administer / successful
generator of income
Individual income tax is easy to administer
 Ex: of Unsuccessful (luxury tax on private aircraft 1991)

LETS CREATE A GRAPHIC ORGANIZER
DEPICTING THE CRITERIA FOR TAXES
TO BE EFFECTIVE
Taxes
III. TWO PRINCIPLES OF TAXATION

1. Benefit Principle

A. those who benefit from government goods and
services should pay in proportion to the amount of
benefits they receive
(ex: Gas Tax – those who drive more on roads bare the
burden of the gas tax)
 (ex: Tire tax – Truckers pay more for tires they damage
roads more thus pay for it)
 B. Two Limitations of this Principle:
 1. Many who receive the benefit are the least able to
afford them like Welfare
 2. Benefits are often hard to measure

III. TWO PRINCIPLES OF TAXATION

2. Ability-To-Pay Principle

The wealthier suffer less discomfort paying more
than people with lower incomes
IV. TYPES OF TAXES

A. Proportional Tax


1. imposes the same percentage rate of taxation on
everyone regardless of income
B. Progressive Tax
1. that imposes a higher percentage rate of taxation
on persons with higher incomes
 2. Usually use a marginal tax rate (percentage of
income paid in taxes increases as income goes up)


C. Regressive Tax

1. imposes higher percentage rate of taxation on low
incomes than on high incomes