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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
use or in a secure electronic network environment that prevents downloading or reproducing the copyrighted material. Otherwise, no part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including, but not limited to, photocopying, recording, taping, Web distribution, information networks, or information storage and retrieval
systems—without the written permission of the publisher. Printed in the United States of America
ISBN 0-03-033652-X
Copyright © 2002 by Thomson Learning, Inc.
Plan
Présentation d’un système d’imposition Critères d’évaluation d’un système d’impôt Alternatives à l’impôt
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Federal, State, and Local Revenue
Sources: Taxes:
Payroll Income (Corporate and Personal) Property Sales and Excise Estate Tariffs
Fees Tuition Licenses
$2.5 trillion
Copyright © 2002 by Thomson Learning, Inc.
Determinants of How Much We Are Taxed
Political Equilibrium Market Equilibrium and Its Efficiency The Distribution of Income
Copyright © 2002 by Thomson Learning, Inc.
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.
Copyright © 2002 by Thomson Learning, Inc.
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.
Copyright © 2002 by Thomson Learning, Inc.
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
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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
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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
Copyright © 2002 by Thomson Learning, Inc.
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
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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
S
we
de
n
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ch R
ep
ub
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the
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Lu
xem
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F
ran
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Au
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Gre
ece
*
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ly
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ng
ary
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rma
ny
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w Z
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*
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ain
Un
ited
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om
Sw
itze
rla
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ort
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Au
stra
lia
Jap
an
Un
ited
Sta
tes
* T
urk
ey
Ko
rea
M
exi
co
Copyright © 2002 by Thomson Learning, Inc.
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.
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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.
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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.
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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
Unreported Income per Year (Dollars)
0
MC2 C
MC1
Cos
t and
Ben
efit
Unreported Income per Year (Dollars)
0
MB = MTR
E
1 E
E 2
E
E1
MB1 = MTR1
D* 2
D* 1
D* 2
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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.
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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
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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.
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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
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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*
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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.