Chapter 12-Taxation and Income distribution Public economics
1 Chapter 12 – Taxation and Income Distribution Public Economics
Introduction Many policies center around whether the tax burden is distributed fairly Not as simple as analyzing how much in taxes each person actually paid, because of tax-induced changes to price
2 Introduction • Many policies center around whether the tax burden is distributed fairly. • Not as simple as analyzing how much in taxes each person actually paid, because of tax-induced changes to price
Introduction Two main concepts of how a tax is distributed Statutory incidence - who is legally responsible for tax Economic incidence -the true change in the distribution of income induced by tax These two concepts differ because of tax shifting
3 Introduction • Two main concepts of how a tax is distributed: – Statutory incidence – who is legally responsible for tax – Economic incidence – the true change in the distribution of income induced by tax. – These two concepts differ because of tax shifting
Tax Incidence: General Remarks Only people can bear taxes Business paying their fair share simply shifts the tax burden to different people Can study people whose total income consists of different proportions of labor earnings, capital income, and so on Sometimes appropriate to study incidence of a tax across regions
4 Tax Incidence: General Remarks • Only people can bear taxes – Business paying their fair share simply shifts the tax burden to different people – Can study people whose total income consists of different proportions of labor earnings, capital income, and so on. – Sometimes appropriate to study incidence of a tax across regions
Tax Incidence: General Remarks Both sources and uses of income should be considered Tax affects consumers, workers in industry, and owners Economists often ignore the sources side
5 Tax Incidence: General Remarks • Both Sources and Uses of Income should be considered – Tax affects consumers, workers in industry, and owners – Economists often ignore the sources side
Tax Incidence: General Remarks Incidence depends on how prices are determined Industry structure matters Short- versus long-run responses
6 Tax Incidence: General Remarks • Incidence depends on how prices are determined – Industry structure matters – Short- versus long-run responses
Tax Incidence: General Remarks Incidence depends on disposition of tax revenue Balanced budget incidence computes the combined effects of levying taxes and government spending financed by those taxes Differential tax incidence compares the incidence of one tax to another, ignoring how the money is spent Often the comparison tax is a lump sum tax -a tax that does not depend on a person's behavior
7 Tax Incidence: General Remarks • Incidence depends on disposition of tax revenue – Balanced budget incidence computes the combined effects of levying taxes and government spending financed by those taxes. – Differential tax incidence compares the incidence of one tax to another, ignoring how the money is spent. • Often the comparison tax is a lump sum tax – a tax that does not depend on a person’s behavior
Tax Incidence: General Remarks Tax progressiveness can be measured in a number of ways a tax is often classified as Progressive Regressive roportional Proportional taxes are straightforward: ratio of taxes to income is constant regardless of income level
8 Tax Incidence: General Remarks • Tax progressiveness can be measured in a number of ways – A tax is often classified as: • Progressive • Regressive • Proportional – Proportional taxes are straightforward: ratio of taxes to income is constant regardless of income level
Tax Incidence: General Remarks Can define progressive(and regressive) taxes in a number of ways Can compute in terms of Average tax rate(ratio of total taxes total income)or Marginal tax rate( tax rate on last dollar of income)
9 Tax Incidence: General Remarks • Can define progressive (and regressive) taxes in a number of ways. • Can compute in terms of – Average tax rate (ratio of total taxes total income) or – Marginal tax rate (tax rate on last dollar of income)
Tax Incidence: General Remarks Measuring how progressive a tax system is present additional difficulties. Consider two simple definitions The first one says that the greater the increase in average tax rates as income rises, the more progressive is the system 000 10
10 Tax Incidence: General Remarks • Measuring how progressive a tax system is present additional difficulties. Consider two simple definitions. – The first one says that the greater the increase in average tax rates as income rises, the more progressive is the system. v I I T I T I 1 1 0 1 1 0 0 = − −