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51 Cards in this Set
- Front
- Back
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Incidence: |
the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that ultimately bears the burden of, or ultimately has to pay, the tax. |
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Basic Elements of Tax System |
Tax Base Tax Rate Tax Unit |
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Tax Base |
Economic activity on which tax is levied. Simplest form is head/lump sum/poll tax Lump Sum; Income; Expenditure; Wealth. |
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Lump Sum Tax |
Levied on individual, regardless of income and spending. - Inequitable as everyone pays the same regardless of capacity to pay - Non distorting = efficient! Second Welfare Theorum depends on lumpsum - Often used in research/models where tax is not the focus - Thatcher tried to introduce - was thrown out |
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Income Tax |
Conceptually the same as Expenditure tax Y = Y(L) + Y(C) = C+S Y(L): Labour income ... Y(C): Capital Income aka. Direct Taxes; borne by entity that pays it. Progressive but distortionary |
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Consumption Tax |
Indirect tax; may be legally borne by one and paid by another - payroll taxes, commodity tax... C + S (Consumption + Savings) Regressive - less distortionary |
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Wealth Tax |
Tax on stock of assest rather than flow of income spawned from those assets. Tax value of assets held by individual/corporation eg. Land tax |
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General / Partial |
General: Levied Uniformly on all components of a tax base with no exceptions eg. based on total income recieved Partial: Selective Tax levied on only park of tax base. AUSTRALIA: Income Tax makes up 65% total tax revenue - Not general as it allows some exeptions (imputed rent, bequests... savings & retirement incomes taxed at concessional rates) |
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Most Common Consumption Tax |
Expenditure Tax - Tax on total income - Savings -- avoids double taxation! ---Currently: income earned on savings is tax and again when spent! Economists have been pushing for just an Expenditure tax to avoid extra taxation - never implemented due to politics |
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Value Added tax
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aka GST in AUS (General Consumption Tax) - % tax on value added at each stage of production - Mostly borne by consumer (end of the line!) - Rarely applied generally; most OECD gov except health, education, some food... equaling about 40% of consumption! (= distortion) ----EXCLUDING NZ, VAT is quite general. |
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TAX RATE |
Tax Collected / Tax Base Average Tax Rate ATR = Total Tax paid/Value of Tax Base Marginal Tax Rate MTR = Change in Tax Paid / Change of Tax Base |
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Tax Rate Structure (3) |
Progressive Tax System Proportional Tax System Regressive Tax System |
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Progressive Tax System |
ATR rises as tax base value changes (MTR is changing) eg. Income Tax |
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Proportional Tax System |
ATR is constant as tax base value changes (MTR does nothing) |
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Regressive Tax System |
ATR falls as the base rate changes |
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Tax Unit |
Entity on which tax is levied Individuals or House Holds (irrelevant if MTR is constant - flat rate tax) Choice can have significant effect on tax liability - may have efficiency and equity implications |
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Tax Unit - Individuals |
Most common for AUS and most OECD countries - Treat individuals as income tax unit. -- but they use households as unit for welfare/redistribution! |
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Tax Unit - Household |
Some countries (France, Germany, Switzerland) treat FAMILIES as a unit - raises opportunity for income shifting within the household |
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EXEMPTIONS |
Tax concessions; some are complete exemptions, others partial AUS has: - Superannuation income - Capital gains on owner-occupied housing -----there is tax on investment housing - Bequests/Inheritance ------ no death duties - NFP organisations - no income tax - Certain Goods and Services (health etc...) |
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Tax Hypothecation |
Links expenditure to the source of funds - Common. 25% state rev in USA is from it Funds are used to compensate a group in society that has lost an entitlement or suffered exceptional damanges - Social Security Contributions, Super, Flood Damage Levy, Roads... Bush Fires... Treasure HATES it as it reduces their autonomy |
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Tax Hypothecation ADVANTAGES |
- Politically easier to raise revenue (can see benefit) - Facilitates economic tests of public benefit of taxes |
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Tax Hypothecation DISADVANTAGES |
- If hypothecated revenue < expenditure it effectively just contributes to consolidated revenue - If revenue > expenditure resource allocation may be distorted. |
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What is Tax Avoidance |
Any behaviour that legally reduces tax liability; organising business affairs to avoid taxation ** Salary sacrifice; **Shifting Income to retirement fund at lower rate; **Shifting assets to low tax family member |
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What is Tax Evasion |
Not paying tax that is legally due - Under reporting income; over-reporting expenses - Offshore earnings hidden in havens |
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Evasion VS Avoidance |
Hard to distinguishin Aus: if tax avoidance is the main driver behind an activity it's considered tax evasion and is not allowed- Apple, BHP...
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Tax Avoidance facts |
- Distorts economic behaviour - Ties up professional resources - May be inequitable (those that can pay can be better at avoiding) - Means tax rates must be increase - compared to if there was no avoidance |
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Tax Evasion facts
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- Creates an informal economy (cash) - Distorts economic behavior - Is inconsistent with equity |
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Evaluating Tax Systems: How should tax revenues be raised to meet expenditure requirements and distributional objectives while creating minimum efficiency cost |
Good tax system: 1) Equitable 2) Efficient (minimize DWL) 3) Administratively Simple (4) Politically responsible ) |
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Key Concepts - Equity |
Ability to pay principle
ADAM SMITH: "individuals should contribute according to their respective abilities" ----Ability to pay is difficult to measure, money income used as a proxy but that causes issues----- |
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Key Concepts - Equity: Main principles
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Horizontal: Individuals in like circumstances should be treated similarly (AUS) Vertical: Individuals with more capacity to pay should pay more |
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Key Concepts - Equity: Other principles |
Benefit Principle: Individuals should pay for the benefits they recieve - can't work due to public goods etc etc. These are hypothecated taxes. Intergenerational Equity: Fairness between generations Principle of "Fair Desserts": Individuals deserve to keep what they work for/earn |
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Key Concepts - Efficiency |
All taxes (excluding lump sum) distort prices. Price distortions = price wedges ---- occur between: - Wages received & Marginal product (labour tax) - the Gross & Net Return of Capital (capital tax) - Product Prices & Marginal Costs (commodity tax) |
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Key Concepts - Efficiency: Other issues |
- Administration & Compliance costs ----- ~1% of revenue collected in Aus (0.3% GDP) ----- Cost of designing, operating & changing system - Compliance costs: Cost of dealing w/tax system ----- agents/advisors estimated 2-4% GDP - Political Responsibility: Transparency and Certainty |
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Statutory Incidence |
Determines who is responsible for paying tax Legalities, less important - focus on economics |
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Economic Incidence |
Change in any real income of any economic agent as a result of taxation. Reliant on D&S elasticity |
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Economic Incidence details |
- Analysis of incidence helps explain how taxes change price of commodities and factors of production which affects distributional income - Shifting of tax burden occurs mainly with indirect taxes - Distribution of tax burden is independent of statutory incidence (who pays) |
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Commodity Taxes |
Unit Tax: Given dollar amount for each unit perchased - shifts marginal cost up Ad Valorem Tax: a percentage tax rate on value/quantity of commodity/service |
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Commodity Tax - on producers |
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Commodity Tax - on Consumers |
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Economic Incidence |
Depends on elasticity of demand & supply - If Demand = Perfectly inelastic // Supply = elastic ------ Consumers pay tax - If Demand = elastic // Supply = perfectly inelastic ------ Producers pay tax - For cases in between, tax is shared Agent with the most elastic response bears the least amount of the burden. |
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Incidence with perfectly inelastic demand |
consumers bear burden |
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Incidence with perfectly inelastic supply |
producers bear burden |
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Ad Valorem Tax |
Levied as a proportion of the price of the good - if tax revenue raised is the same as with unit tax the real incidence is the same -- Ad valorum taxes are more fair and becoming more popular |
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Imperfect Competition |
incidences depends on many factors. Monopolists (or a firm with market power) can pass on tax burden to consumers |
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Imperfect competition - how market power can shift burden |
- Price discrimination - Marginal Revenue curve is non-linear - Supply curve is elastic (same with perf comp) - Tax is ad valorum (rather than unit tax) |
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Factors of Production |
Most factor taxes (land, labour (payroll), capital) are ad valorum. Incidence depends on: - Market D&S elasticities - Nature of the market (im/perf comp) - less elastic side of market bears tax |
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Factors of Production - Tax on Labour
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1) Personal Income Tax (PayAsYouEarn) - incidence on YOU 2) Payroll taxes - incidence on employer |
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Factors of Production - Tax on Labour - Payroll Tax who bears |
Relatively inelastic labour Supply curve = labourer bears most of the tax Elastic labour supply at Union determined wage = employer bears tax |
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Factors of Production - Capital Income |
Closed Economy: if inelastic supply, burden borne by domestic capital owners Open Economy: if perfectly elastic, domestic capital owners still bear cost -> lower foreign capital supply Open or Closed economy changes supply of foreign capital, not the burden. |
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Factors of Production - Land |
Total supply of land is perfectly inelastic - General land tax borne by land owner; reduces market price of the land -- hard to pass burden on. Many land taxes are selective. |
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General Equilibrium Analysis - CGE modelling |
examining the big picture, all effects (flow on affects of taxation) |
