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Public Goods, Taxes

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Title: Public Goods, Taxes


1
Public Goods, Taxes Income Distribution
  • Chapter 11

2
2 KINDS OF GOODS
  • Public Goods
  • Goods that are neither excludable nor rival in
    consumption
  • Private Goods
  • Goods that are both excludable rival in
    consumption

Excludable- consumer who can not pay are excluded
Rival- consumption by one reduces quantity for
others
Public Goods clean air, police protection,
radio signals, national defense
Private Goods Food, Coffee, airline tickets
3
Public Good Efficiency
  • When goods are available free of charge gt market
    forces will not allocate resources efficiently
  • Government should collect taxes provide public
    goods when
  • Total Benefits Total Costs
  • Examples
  • National Defense
  • Basic Research
  • Fighting Poverty

4
Problems with Public Goods
  • Free-rider- a person who receives the benefit of
    a good but avoids paying for it
  • Examples
  • Slacker in group work at School
  • Volunteer money for neighborhood cleanup
  • Fundraising for Fire Department

5
Types of Taxes
  • Progressive Tax-
  • Income ? gt Average Tax Rate ?
  • Example U.S. Federal Income Tax
  • Regressive Tax-
  • Income ? gt Average Tax Rate ?
  • Example Sales Tax, Gasoline Tax, Bridge Tax
  • Proportional Tax
  • Income ? or ? gt Average Tax Rate stays the same
  • Example Flat Income Tax, Corporate Taxes
  • Excise Tax
  • Flat fee per unit, paid at purchase
  • Example Cigarettes, Gasoline (both are also
    regressive in tax incidence)

Tax Incidence Who Pays?
6
Progressive Income Tax
Example If you Earn 100,000 ( 7,000   -   0
)  x 10    700 (28,400   -  
7,000 )  x 15 3,210 (68,800   -
  28,400 )  x .25 10,100 (100,000   -
  68,800 )  x .28 8,736  
Total  
22,746 Actual Tax Rate 22.7
7
Income Distribution Lorenz Curve
  • Egalitarian Society- equal society
  • How to best measure Inequality
  • Average Income
  • incomplete measure
  • often inaccurate
  • Distribution of Income
  • more precise measure of inequality
  • Lorenz Curve illustrates income
  • distribution

8
Gini Index Summary
  • Measures the distance from line of perfect
    equality to Lorenz Curve
  • Gini Index ranges from Zero to 1
  • An index of 0 (zero) means perfect EQUALITY (on
    line)
  • As the Gini Index moves from 0 ? 1 inequality
    increases

9
U.S. Gini Index Comparison
  • U.S.A. .46
  • Japan .26
  • Germany .32
  • France .33
  • Bolivia .58
  • Brazil .59

10
Worksheets
  • What is a Fair Tax
  • Worksheet A Who pays the most Taxes

11
Tax Cut Controversy
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