Public%20Choice%20Theory%20and%20the%20Economics%20of%20Taxation

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Public Choice Theoryand the Economics of Taxation

• Chapter 17

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Revealed preference through voting

• Voters vote individual preferences
• favors outcomes where large benefits are received
  by minorities, at low cost to the majority
• Voters will vote against measures that have
  negative net benefits for the majority, but may
  have positive net benefits overall
• Voters will vote for measures that have positive
  net benefits for the majority, but may have
  negative net benefits overall

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Voters as interest groups

• Where benefits are concentrated, there is an
  incentive to lobby and provide campaign
  contributions to achieve political ends
• No opposing counterweight if costs are not
  similarly concentrated
• We all end up paying for many programs which only
  benefit such interest groups
• Logrolling can partly undo this bias

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Median voter model

• The median voter is the one whose preferences are
  realized in public policy
• Most voters will be dissatisfied, because a clear
  majority will desire either more or less
  government, taxes, services, etc.
• These groups will generally cancel out

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Tax apportionment

• Benefits-received principlecharge user fees
• Ability-to-pay principleprogressive income tax
• Progressive taxaverage tax rate increases with
  incomebecomes a higher absolute amount and a
  higher percentage of total income, as income
  increases
• Regressive taxaverage tax rate falls with higher
  incomebecomes a higher absolute amount, but a
  lower percentage of income, as income increase
• Proportional taxaverage rate remains the same as
  income rises or fallstax increases absolutely
  with higher income

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Examples

• Income taxprogressive 10 35
• Sales taxhighly regressive, though some exempt
  items (food, and in some states, small purchases
  of clothing) are designed to mitigate this effect
• Corporate income taxproportional, but
  proprietorships, partnerships, and closely-held
  corporations are exempt
• Payroll taxes (Social Security
  Medicaid)regressive because high levels of
  payroll income, and all non-wage income is exempt
  
• Property taxesregressive like sales tax

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Tax incidence and efficiency loss

• Excise taxes are jointly borne by producers and
  consumers, depending on demand and supply
  elasticities
• They also result in deadweight loss
• Producer and consumer surplus which is completely
  wiped out and not captured by the government

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Demand elasticity and sales tax incidence

• The more elastic demand (the flatter the demand
  curve), the more tax incidence (for an excise or
  sales tax on a particular product) is shifted to
  producers, because consumers buy significantly
  less in response to the higher after-tax price
• The less elastic demand (the steeper the demand
  curve), the more the tax burden is carried by
  consumers, who buy nearly the same quantity
  regardless of the after-tax price

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Supply elasticity and tax incidence

• The more elastic supply (the flatter the supply
  curve), the more of the tax burden is paid by
  consumers
• The less elastic supply (the steeper the supply
  curve), the more the tax burden is paid by
  producers.

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Goals for taxation

• Government revenue
• Income redistribution
• Rich to poor
• Poor to rich
• Their party to my party
• Reduce negative externalities
• E.g., excise taxes on products with negative
  externalities

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U.S. tax incidence

• Federal taxes are generally progressive
• State and local taxes are generally less so,
  often being highly regressive
• Overall, U.S. taxes are mildly progressive, but
  this varies from state to state, and even among
  municipalities within a given state