ECO 2030 1st Edition Lecture 29 Outline of Last Lecture I The Tax Burden Outline of Current Lecture II III IV V VI VII The fiscal challenge ahead Taxes Government Spending Taxes and Efficiency Vertical Equity Horizontal Equity Current Lecture The impending challenge ahead The rise in health care needs to be fixed limit the financial burden of lawsuits on the healthcare system encourage competition to drive down costs promote more use of information technology Handling Spending increases Can t simply increase budget deficit need to reduce it Raise taxes as a percent of GDP Reduce the promises to the elderly of the future People should be encouraged to take care of themselves better Can also raise the retirement age Give people incentives to save money during their working years The problem is that the growing elderly population will put more and more pressure on the government budget because the elderly population is increasing This means that federal spending on them is also increasing State and local governments make money by Sales tax a percentage of money spent in stores Property tax a percentage of estimated value of house Individual and corporate income taxes Funds from the federal government block grants Other Receipts fees from fishing and hunting licences tolls fares from public transportation Receipts of State and Local governments in 2011 Percent of receipts Amount per person Amount Billions TAX These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute 22 1481 462 Sales tax 21 1410 440 Property Tax 16 1035 323 Individual Income Tax 2 154 48 Corporate Income tax 24 1596 498 Federal Government 14 939 293 Other 100 6 615 2 064 Total Spending of State and Local governments 2011 1 Education 34 2 Health 22 3 Public Order and Safety 13 4 Income Security 8 5 Highways 6 6 etc Taxes and Efficiency Policymakers adopt a tax system goal is equity and efficiency Want to reduce deadweight losses which are results of taxes distort decisions that people make Want to reduce administrative burden simplify tax system Efficient tax systems should have small deadweight losses small administrative burdens Administrative burden time spent filling out forms time spent keeping records resources used to enforce tax laws tax lawyers and accountants Simplifying tax laws can be politically difficult The problem with individual income taxes Changes people s behavior deadweight losses less efficient allocation of resources Discourages people from working hard Discourages people from saving Consumption Tax encourages people to save money and work hard Does not distort people s saving decisions European countries rely more on consumption taxes than the US Or on Value added Tax VAT a tax collected in stages as the good is developed into a product taxes each time a raw material gains value as it becomes a finished product Know marginal vs average tax rate Remember that marginal tax rate is the tax on the next additional dollar you make Average tax rate total taxes paid divided by a total income Average tax rate the extra taxes paid on an additional dollar of income Lump sum taxes same amount of tax for everyone most efficient possible a persons decisions do not alter the amount owed this does not distort incentives no deadweight losses Minimal administrative burdens But not Equity The benefits principle says people should pay taxes based on the benefits they receive This tries to make public goods like private goods Vertical Equity How much should the rich pay Proportional tax where high and low income taxpayers pay the same fraction of income Regressive tax where high income people pay a smaller fraction of their income to taxes Progressive tax where high income taxpayers pay a greater fraction of their income to taxes Horizontal Equity people who make the same amount of money should pay the same amount of tax no special benefits no loopholes special tax breaks
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