Taxation

1
Taxation

• Definition of a Tax
• Monetary or in-kind claim to private wealth
• include military draft, income tax, revenues from
  lottery etc.

2
Purpose of Taxes

• Financing government activities
• Effect incentives

3
Taxes

• Goods ands services
• Labor income
• Capital income

4
Desirable Features of a Tax System

• Efficiency
• Equity
• Simplicity

5
Definition of Income

• Haig-Simon
• Monetary value of consumption plus the change in
  net wealth

6
Problems with having a Broad Tax-Base

• Hard to measure income
• Hard to capture

7
EquityWhat is Fair?

• Horizontal equity
• Equals are treated equal
• Vertical equity
• People with different incomes should be/are
  treated fairly

8
Different Tax Rates

• Proportional tax
• average tax rate (marginal tax rate) is constant
• Progressive tax
• increasing average (marginal) tax rate
• Regressive tax
• decreasing average (marginal) tax rate

9
Incidence of a Tax

• Only people can carry tax burdens
• Who carry the tax burden?
• Usually not the same as who legally pay the tax
• Depends on the elasticities of demand and supply
• Rule Being inelastic hurts you!!

10
General Equilibrium of Incidence

• Harberger (1962)

11
Stolper-Samuelson Theorem

• A tax on a good that is labor intense (capital
  intense) result in a transfer of income from
  labor owners (capital owners) to capital owners
  (labor owners).

12
Cost of Taxation

• Taxes distort economic decisions gt excess burden
• But only if the tax change the relative price
• Even if consumption is unaffected by a tax is
  there a excess burden

13
Cost of Taxation

• Compensated demand
• Substitution effect only demand curve
• Consumers are compensated for price changes so as
  to keep them on the same indifference curve.
  Isolate the price change holding utility
  constant.
• Harberger triangles