Taxation: Criteria for Evaluating Revenue Options

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Taxation Criteria for Evaluating Revenue Options

• Troy University
• PA6650- Governmental Budgeting
• Chapter 7

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Taxation

• Governments exercise their sovereign power to
  collect coercive paymentstaxesrather than by
  selling products or services
• Type and amount are determined through political
  processes

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Overview

• 75 of income from taxes levied on
• Income
• Purchases or sales
• Property ownership or transfer
• 25 from miscellaneous revenue
• Lotteries
• Interest on invested funds
• Intergovernmental revenue

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Overview of Taxation Systems

• Separation of revenue sources by level of
  government
• Federal level relies mostly on individual income
  tax (65 of revenue) and corporate income taxes
  (10) and there is no federal General Sales Tax.
  Some federal excise taxes(motor fuels), customs
  duties, etc. No federal property tax.
• States use individual income taxes (41 states)
  and corporate income taxes (44 states) and sales
  taxes on goods and services (45 states)
• Localities use property taxes and some income
  taxes

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Comparison to Other Countries

• Page 297 of text
• Notice the Scandinavian Countries
• Mexico, Korea

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So You Think Youre Being Taxed?
TAX FREEDOM DAY for 2007 is April 30
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So You Think Youre Being Taxed?
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So You Think Youre Being Taxed?
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Exercise

• Create a list of the taxes we pay

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Standards For Tax Policy

• The primary goal of taxation is to transfer
  control of resources from one group in the
  society to another and to do so in ways that do
  not jeopardize, and may even facilitate, the
  attainment of other economic goals
• Taxation shifts purchasing power among groups
• Taxation shifts control of purchasing power from
  private sector to public sector

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Adam Smiths Tax Maxims

• Everyone should contribute proportionally
• Clearly defined amount, not arbitrary
• Timing and method should be convenient
• Minimum impact

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Equity

• Standard equity methods
• Benefits Received (user fees, motor fuels)
• Ability to pay (income, property taxes)
• Other equity approaches (Wildavsky)
• Get what you pay for?
• Equal access?
• Equal results?

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Equity

• HORIZONTAL EQUITY
• Equal treatment of taxpayers with equal ability
  to pay
• VERTICAL EQUITY
• Relative tax burden on taxpayers with different
  ability to pay
• REGRESSIVE lower rates in high ability groups
• PROGRESSIVE higher rates in high ability groups
• PROPORTIONAL same rates in all groups

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Who Really Pays?

• IMPACT, SHIFTING, and INCIDENCE (p.305)
• How businesses respond to taxation
• Forward shifting higher prices to customers for
  product
• Absorption lower return to owners of the
  business
• Backward shifting lower payment to suppliers of
  resources to the business

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Adequacy ofRevenue Production

• Taxes should be socially acceptable
• Some taxation is punitive (cigarettes, alcohol)
• TAX REVENUE EQUATION
• Tax Yield R
• Tax rate t
• Tax Base B
• R t x B
• LAFFER CURVE rate-revenue curve

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Adequacy ofRevenue Production

• Short-run (cyclical) and Long-run (secular)
  issues
• CYCLICAL ADEQUACY (provides good revenue
  stability during boom-bust cycles)
• Income Elasticity a 1 increase in income
  yields gt 1 spending is elastic
• Motor fuel and tobacco demand are inelastic

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Collectability

• Must keep collection costs low
• Complexity costs more

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Economic Effects

• Work v. leisure (work less due to taxes)
• Business operations (relocating or curtailing
  ops)
• Shopping, purchases, location (out-of-state
  purchasing)
• Personal management (behavior due to tax breaks,
  like babys birth date or SUVs)
• Productive investment (unproductive tax shelters)
• Savings (less money saved)

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State and Local Taxes and Economic Development

• Competitive rates with neighbors
• Tax breaks

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Transparency

• Adoption laws should be adopted in an open,
  legislative process
• Administration objective and explicit criteria
• Compliance requirements understandable tax
  computation
• Amount of payment clearly defined and known

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Taxes and Externalities

• Regulations, pollution rights, subsidies, taxes
• Two types of tax instruments
• Emission Taxes (20/lb of sulphur dioxide)
• Indirect taxes (1/ton of coal burned)

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Conclusion

• Taxes on income, taxes on ownership and ownership
  exchange, and taxes on purchase or sales
• Taxes are involuntary
• Taxes can be evaluated on several criteria
• Equity (horizontal and vertical)
• Adequacy (stability)
• Collectability
• Transparency
• Economic effects