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The Role of Government in the American Economy

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					                             CHAPTER



                             12
         Taxes on Economic
            Transactions

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe
    Excise Taxes, Unit Taxes, Ad
           Valorem Taxes
   Excise tax
      Placed      on sale of specific good/service
   Unit tax
      Certain      amount per unit of good sold
   Ad valorem tax
      Fixed     percentage of value of taxed goods



    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
Unit Taxes Versus Ad Valorem
            Taxes




PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe
Unit Taxes Versus Ad Valorem
            Taxes




PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe
Unit Taxes versus Ad Valorem
            Taxes
   Fluctuation in price of good
      Amount       per unit from unit tax unchanged

      Amount  per unit from ad valorem tax
       fluctuates




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
     Unit Taxes and Ad Valorem
               Taxes
   Advantages of unit taxes
        Amount of tax not affected by price of good
   Disadvantages
        Favor expensive units
        Inflation can have adverse effect on real tax
   Advantages of ad valorem taxes
        Unaffected in real terms by inflation
   Disadvantages
        Less appropriate when value of a good cannot be
         easily determined

    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
    Revenues from Excise Taxes
 Small source of government revenue
 Closely related to user charges at federal
  level




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
    User Charges and Efficiency
 Minimize excess burden of taxation
 Acts as price for public sector output

 Acts as rationing device

 May be desirable even when marginal
  cost is zero




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
      User Charges and Demand
             Revelation
   Allow producers to gauge consumer
    demand




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
        User Charges and Equity
 Satisfy benefit principle of taxation
 Disadvantages: redistributional programs
      Difficultto determine who benefits and how
       benefits are shared
      Costly to charge user fees because of non-
       excludability




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
    Approximating User Charges
         in the Real World
 User charges may be difficult to
  approximate
 User Charges as Taxes

  exp: gasoline tax to fund highway
  construction and maintainance
      Similar to market prices
      Are among most effective and fair methods
       of taxation when feasible
    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
         User Charges and Public
               Enterprise
 Output can be provided more efficiently
  when user fees employed as method of
  taxation
 Revenues and User Fees
      Makes  up substantial amount of state and
       local government revenues




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
        Import and Export Taxes
 Import duty (tariff) – tax levied on
  imported goods
 Easy transactions to monitor and collect

 Important source of revenue for less
  developed countries




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
         Import Taxes and Trade
              Restrictions
 Used in developed countries to
  discourage imports
 Trade barriers politically produced
  protection for domestic industries
 Reduction of trade barriers would
  increase value of total world output



    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
                               Quotas
 Law restricting quantity of good that can
  be imported
 No tax is collected

 Less beneficial than a tariff to public

 More beneficial to interest groups




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
Effects of Quotas and Tariffs




PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe
                Trade Agreements
 Established to keep trade barriers low
 Countries agree not to subsidize
  exporting industries
 GATT, WTO, EU, NAFTA




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
              General Sales Taxes
 Ad Valorem tax on all retail sales
 Effects similar to an excise tax
      Restricts level of output
      Raises prices

   Approximates tax on taxpayer’s level of
    consumption


    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
    Is the Sales Tax Regressive?
 Often viewed as regressive with respect
  to income
 Should consider income over life cycle

 Sales Taxes and the Internet
      Cannot  tax internet access
      Fear that internet will lead to decline in
       state sales tax revenues
      Streamlined Sales Tax Project

    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
        Income and Substitution
                Effects
   Substitution effect
      Increasedrelative price causes substitution
       from one good to another
   Income effect
      Effect     of lowering an individual’s income




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
          Possible Effects of a
           Consumption Tax




PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe
                   Turnover Taxes
 Paid as fixed percentage of value of
  transaction
 Taxes all transactions

 Inefficient, discourages transactions

 Encourages vertical integration




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
          Value Added Tax (VAT)
   Tax on value added by each producer in
    economy




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
             VAT versus Sales Tax
   VAT
      Leviedon suppliers
      No need to distinguish between retail and
       wholesale purchasers
   Sales tax
      Levied  on demanders
      Easier to collect

      Easier to calculate

    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
Value Added Tax in European
          Union
 European Community nations use a VAT
  as major source of revenue
 Taxes on goods and services are heavier
  than in the U.S.




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
              Visibility of the Tax
 More difficult to evade a VAT
 Taxpayers may be less resistant to paying
  the tax
 May be politically more popular than a
  sales tax because its effects are more
  likely to be misunderstood



    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe

				
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