Chapter 11Principles of Tax Policy
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
People who benefit from government expenditures should pay
Views a tax as a price paid for government supplied good
Appealing on equity grounds
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Features of a user charge
Can act as a rationing device
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Share some characteristics of benefit principle
Example: Property taxes and education
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Individuals should pay taxes in proportion to ability to pay
Can apportion tax burden for activities undertaken for the public good
Redistribution programs
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Implementing Ability to Pay
Is it fair for someone to pay more because of greater ability to pay?
When do people have same ability to pay?
How much more should person with higher income pay?
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Horizontal Equity
People with equal ability to pay assessed same amount in taxes
Example: Deductions for children
Concept of equity may be at odds with benefit principle
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Vertical Equity
People with greater abilities to pay should pay more in taxes
Does not specify how much more one should pay
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Proportional tax
Regressive tax
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Excess burden of taxation
Used to raise revenue
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
[Insert Figure 11.3]
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Politics and Tax Policy
Special interests and taxation
bias in tax policy to favor special interests over general public interests
Federal versus state and local taxation
special interests have greater influence on federal tax policy
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Can withstand negative influence of special interests
More likely to simplify tax code
Randall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
11-*
Equity and efficiency