Public Choice Theory and The Economics of Taxation

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Public Choice TheoryandThe Economics of Taxation
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PUBLIC CHOICE THEORY
Majority Voting
Fails to take into account the strength of the
preferences of individual voters - and may yield
economically inefficient outcomes...
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PUBLIC CHOICE THEORY
Majority Voting
Inefficient Voting Outcomes
COMPARE 300 TAX TO PERSONAL
The No Votes Win but, the decision is
inefficient
BENEFIT OF A PUBLIC GOOD
Adams - BENEFIT 700 - "YES"
Benson - BENEFIT 250 - "NO"
Conrad - BENEFIT 200 - "NO"
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PUBLIC CHOICE THEORY
An Inefficient NO Vote
The NO vote wins but is inefficient since...
700
Benefit Tax
300
250
200
(YES)
(NO)
(NO)
Conrad
Benson
Adams
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PUBLIC CHOICE THEORY
An Inefficient NO Vote
The NO vote wins but is inefficient since... MSB
1,150 gt MSC 900
700
Benefit Tax
300
250
200
(YES)
(NO)
(NO)
Conrad
Benson
Adams
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PUBLIC CHOICE THEORY
An Inefficient NO Vote
The NO vote wins but is inefficient since... MSB
1,150 gt MSC 900
700
Benefit Tax
300
250
200
(YES)
(NO)
(NO)
Conrad
Benson
Adams
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PUBLIC CHOICE THEORY
An Inefficient YES Vote
The Yes vote wins but is inefficient since....
Benefit Tax
350
350
300
100
(NO)
(YES)
(YES)
Conrad
Benson
Adams
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PUBLIC CHOICE THEORY
An Inefficient YES Vote
The Yes vote wins but is inefficient since....
Benefit Tax
MSB 800 lt MSC 900
350
350
300
100
(NO)
(YES)
(YES)
Conrad
Benson
Adams
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PUBLIC CHOICE THEORY
Interest Groups Political Logrolling
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GOVERNMENT FAILURE
Special Interest Effect Rent-Seeking
Behavior Clear Benefits, Hidden Costs Limited and
Bundled Choice Bureaucracy and Inefficiency Imperf
ect Institutions
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APPORTIONING THE TAX BURDEN
Benefits-Received Principle Ability-to-Pay
Principle

• Progressive Tax
• Regressive Tax
• Proportional Tax

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TAX APPLICATIONS
Identify whether progressive, regressive, or
proportional

• Personal Income Tax
• Progressive
• Sales Tax
• Regressive
• Corporate Income Tax
• Proportional - Regressive
• Payroll Taxes
• Regressive
• Property Taxes
• Regressive

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TAX INCIDENCE AND EFFICIENCY LOSS
Division of Burden
Elasticities With a specific supply - Greater
elasticity greater shift to consumers With a
specific demand - The more inelastic the supply -
the greater the portion borne by producers
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TAX INCIDENCE AND EFFICIENCY LOSS

• Tax Revenues
• Efficiency Loss of a Tax
• Role of Elasticities
• Qualifications
• Redistributive Goals
• Reducing Negative Externalities

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THE U.S. TAX STRUCTURE
PROBABLE INCIDENCE OF U.S. TAXES
Personal Income Tax Individual Corporate Income
Tax Stockholders Consumers Sales and Excise
Taxes Consumers Property Taxes Owner or Renter
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GLOBAL PERSPECTIVE
Taxes on Goods and Services as a Percentage of
Total Tax Revenues, Selected Nations
0 5 10 15 20 25
30 35
United Kingdom Netherlands France Germany Italy Ca
nada Sweden United States Japan
2003 DATA
Source Organization for Economic Cooperation and
Development
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THE ISSUE OF FREEDOM
The Conservative Position
The Liberal Position
Fallacy of Limited Decisions
Chapter Conclusions
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KEY TERMS

• public choice theory
• logrolling
• paradox of voting
• median-voter model
• government failure
• special-interest effect
• rent seeking
• benefits-received principle

• ability-to-pay principle
• progressive tax
• regressive tax
• proportional tax
• tax incidence
• efficiency loss of a tax
• fallacy of limited decisions

END
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Antitrust, Regulation, and Industrial Policy