Title: Public Goods, Taxes
1Public Goods, Taxes Income Distribution
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
3Public 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
4Problems 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
5Types 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?
6Progressive 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
7Income 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
8Gini 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
10Worksheets
- What is a Fair Tax
- Worksheet A Who pays the most Taxes
11Tax Cut Controversy