Ch. 2 - Policy Standards for a Good Tax Flashcards
Tax policy
A government’s attitude, objectives, and actions with respect to its tax system.
What are the standards for a good tax?
-A good tax should be sufficient to raise the necessary government revenues
-A good tax should be convenient for the government to administer and for people to pay
-A good tax should be efficient in economic terms
-A good tax should be fair
What is sufficiency (as it relates to ‘a good tax’)?
A tax is sufficient if it generates enough funds to pay for teh public good and services provided by the government
How can jurisdictions increase revenues so that their taxes are sufficient?
- Exploit a new tax base (aka start taxing something new)
- Increase the rate of an existing tax
- Enlarge an existing tax base (for example, if you levy sales tax on tangible goods, start taxing services as well)
(random tidbit): What is the rate for the federal social security payroll tax?
6.2%
Static forecast
A projection of revenue gain or loss resulting from a tax rate change that assumes that the change will have no effect on the tax base.
Dynamic forcast
A projection of revenue gain or loss resulting from a tax rate change that assumes that the change will affect the tax base.
Income effect
A behavioral response to an income tax rate increase. Taxpayers engage in more income-producing activities to maintain their level of disposable income. (aka running faster just to stay in the same place).
Substitution effect
A behavioral response to an income tax increase. Taxpayers engage in fewer income-producing activities and more non-income-producing activities.
Supply-side economic theory
A decrease in the highest income tax rates should stimulate economic growth an ultimately result in an increase in government revenues.
What is the second standard for evaluating a tax?
The concept of convenience. A tax should be convenient for the government to administer and for people to pay.
What is the third standard for evaluating a tax?
The third standard for a good tax is economic efficiency. This can mean two different things:
- It can describe a tax that does not interfere with or influence taxpayers economic behavior (aka the income or substitution effect).
- Other times, policymakers describe a tax as efficient when individuals or organizations react to the tax by deliberately changing their economic behavior.
Describe what the classical standard of efficiency believes?
This theory believes that a tax that causes people to modify their economic behavior is inefficient because it distorts the market and may result in suboptimal allocations of goods and services.
Aka, this theory believes that a good tax does not interfere with or influence their behavior.
Describe what the modern standard of efficiency believes?
Instead of trying to design a neutral system where a “good tax” is neutral (aka does not change taxpayers behavior), the modern standard believes that a tax should cause the taxpayers to deliberately change their economic behavior.
True or false: governments promote behavioral change writing tax laws in a way that rewards some behaviors and discourages others.
True!
The penalty takes the form of a higher tax burden, whereas the reward is some type of tax relief.
