Ch 6: Taxation, Revenue Options Flashcards
Governments collect most revenue through
Taxes
T or F, Constitution prohibits states from collecting custom duties
T
Primary revenue sources at different levels of government
Federal: income tax (49.6%)
State: Income + sales
Local: Property (29.2), sales,
Taxes are Compulsory
If one belongs to a tax base, they pay the tax regardless of whether they use the services
Criteria for evaluating fairness of a tax
- adequacy of revenue production
- equity
- collectability
- economic efficiency effects
T or F, Corporate taxes are more stable than property taxes
F
A growing economy is challenging for governments because…
of increased demand for services outpaces increases in revenues.
Elasticity of Service Expenditure
A 1% increase in income generates an increase in government spending >1%
Responsive taxes
Taxes whose revenue increases more rapidly than income.
The revenue elasticity is > than income elasticity of service expenditure.
Most responsive tax
Individual income tax
Least responsive tax
Tobacco tax
Tax with intermediate responsiveness
Sales tax
Price elasticity of demand
% change in quantity demanded/% change in price.
Example: Apple reduced price of airpods from $150 to $125. Sales increased from 200 to 250 per week. PED is 1.5–this means that the demand is elastic. (any number greater than 1 is elastic)
Two approaches to equitable taxation
- Benefits received (market like approach)
- Ability to pay
Equity: Benefits received
User charges, assumes that no services have free riders.
Example–fuel taxes pay for highways
Equity: Ability to pay
Requires that those most capable of bearing the tax burden pay the most – even if they don’t receive services.
Horizontal Equity Dimension
Comparison is among EQUALS
If two taxpayers equal in all relevant aspects pay significantly different tax amounts, the tax system lacks horizontal equity
Lack of horizontal equity results when
Individuals pay especially-priced taxes based on personal preferences
Tax loopholes are used unfairly by a few taxpayers
Capricious tax administration is applied
Particularly difficult cases exist (e.g., property tax valuation)
Vertical Equity Dimension
Comparison is among UNEQUALS
Redistribution of wealth is key to vertical equity
Vertical equity relates income to effective tax rates
Effective tax rates = tax paid / income
Federal income tax is
generally progressive
Payroll taxes are
generally regressive, although easy to collect
Income taxes are
generally proportional or slightly regressive
Sales taxes are
regressive, but depends on whether food/ prescription drugs are exempted
Property taxes
Equity complicated by capricious assessment practices
Forward tax shifting
Business charges higher prices to pay for the tax
Backward tax shifting
Business lowers wages or price they pay for goods to shift tax
Absorption
Tax is absorbed by the the business and results in a lower return to business owners
T or F, All taxes are ultimately borne by individuals
True
Examples–social security and property tax on rental units
