Chapter 10 The Government in the Economy: Taxation and Regulation. Outline. Taxation and Government Spending in the United States.

Transcription

1 in Part II: Foundation of Microeconomics 5. s and Incentives 6. Sellers and Incentives 7. Perfect Competition and the Invisible Hand 8. Trade 9. Externalities and Public Goods 10. in Taxation and W3 Political Economy 11. Markets for Factors of Production 1 / 43

2 in Chapter 10 in the Economy: / 43

3 in / 43

4 in Q: What is the optimal size of government? 4 / 43

5 in In the, governments (federal, state, and local) tax citizens and corporations to correct market failures and externalities, raise revenues, redistribute funds, and finance operations. Through direct regulation and price controls, governments can intervene to influence market outcomes. 5 / 43

6 in Although government intervention sometimes creates inefficiencies, it often results in improved social well-being. Weighing the trade-offs between equity and efficiency is one task of an economist. It is up to each individual to decide when and where government intervention makes the most sense. 6 / 43

7 in 10.1 Spending in the Three levels of government: Federal State Local (city, county) All can collect taxes and spend revenues. 7 / 43

8 in Exhibit 10.1 Total Spending and Total Revenue as a Percentage of National Income ( ) Budget surplus: Tax revenues are greater than spending. Budget deficit: Spending is greater than tax revenues. 8 / 43

9 in Where Does the Money Come From? Exhibit 10.2 Federal Revenue by Category in 2011 Individual income taxes : 47%. Payroll tax: also known as social insurance tax, is a tax on wages that employers are required to withhold from employees pay. Corporate income tax: taxing profits earned by corporations. 9 / 43

10 in Exhibit 10.2 State and Local Receipts by Category in 2011 All Other: 30%, miscellaneous taxes and fees, including tolls on roads, sales from public transportation tickets, vehicle licenses. Revenue from the Federal : 25%. Sales tax: 18%. Property tax: 17%. To fund schools, libraries, and public services such as police and fire protection. Individual income taxes: 11%. 10 / 43

11 in Why Does the Tax and Spend? 1. Raise revenues to pay for public goods 2. Redistribute income to address fairness issues 3. Finance operations of government 4. Correct market failures and externalities 11 / 43

12 in 1. Raising Revenues to pay for public goods National defense and Social Security comprise the two largest categories of federal spending. Exhibit 10.4 Federal Spending by Category in / 43

13 in Exhibit 10.5 State and Local Spending by Category in 2011 two biggest items of spending for state and local government are education (27%) and public welfare (16%). 13 / 43

14 in 2. Redistribute income to address fairness issues s can address equity issues through: Transfer payments payments to individuals or groups. Tax structure Progressive income taxes to limit inequality and distribute the tax burden more toward the rich. In a progressive income tax system, high-income individuals pay higher average taxes and higher marginal taxes. 14 / 43

15 in Exhibit 10.6 Federal Taxes in 2013 for a Single Individual 綜合所得稅稅率級距 (2013 年起, 臺灣 ), 綜合所得淨額 52 萬元以下者, 課徵 5% 超過 52 萬元至 117 萬元者, 12% 超過 117 萬元至 235 萬元者, 20% 超過 235 萬元至 440 萬元者, 30% 超過 440 萬元者, 40% 15 / 43

16 in Exhibit 10.7 Distribution of Income and Federal Taxes / 43

17 in Average tax rate is the total tax paid divided by total income earned. Marginal tax rate is how much of the last dollar earned the household pays in taxes. In a proportional tax system, households pay the same percentage of their incomes in taxes regardless of their income level. marginal and average tax rates do not vary with income. In a regressive tax system, the marginal tax and average tax rates decline with income so that low-income households pay a greater percentage of income. 17 / 43

18 in Exhibit 10.8 Three Tax Systems 18 / 43

19 in Exhibit 10.9 Pre- and Post- Tax Income Share of the Top 1% and Bottom 20% from 1979 to 2010 As a result of transfer programs and progressive taxation, the post-income tax income distribution in the United States is more equal than the pre-tax income shares of the top 1% and the lowest 20% of households. 19 / 43

20 in 3. Financing operations Paying for the day-to-day running of government operations and services. 4. Correcting market failures and externalities Although important in principle to correct market failure and externalities as discussed in Chapter 9, taxes are not usually levied to deal with a specific market failure. 20 / 43

21 in 歷年台灣政府總預算 ( 單位 : 億元,2016 為預算數 ) 21 / 43

22 in 22 / 43

23 in 23 / 43

24 in Taxation: Tax Incidence and Deadweight Losses Who bears the burden of taxes meaning, who actually pays the tax? tax burden can be shared between a buyer and a seller even if it seems to fall on just one of them. Tax incidence refers to how the burden of the tax is distributed across various agents in the economy. 24 / 43

25 in Exhibit A $2 Tax on Producers re is a gap of $2 between what the consumer pays and what the producers receives, resulting from the $2 tax. Not all of the $2 tax falls on the producers: the consumer is paying $1 more and the producer is receiving $1 less. tax incidence on consumers is equivalent to 50% of the tax, even though the tax was placed on producers! 25 / 43

26 in Exhibit A $2 Tax on s re is a gap of $2 between what the consumer pays and what the producers receives, resulting from the $2 tax. Not all of the $2 tax falls on the producers: the consumer is paying $1 more and the producer is receiving $1 less. outcome is identical to the case in which the tax was imposed on producers! 26 / 43

27 in Effects of Demand and Supply Elasticities on the Tax Burden In competitive markets, tax incidence and equilibrium prices and quantities are independent of whether the tax is imposed on consumers or producers. When the supply curve becomes more elastic, the buyers bear more of the tax burden. Exhibit Tax Incidence When Supply Is More Elastic than Demand 27 / 43

28 in Exhibit Tax Incidence When Demand Is More Elastic than Demand When the demand curve becomes more elastic, the producers bear more of the tax burden. A general rule: tax burden falls less heavily on the side of the market that is more elastic that is, more responsive to price changes. 28 / 43

29 in Direct 10.2 A common form of government intervention in markets is direct regulation (or command-and-control regulation. Direct regulation affect just about every walk of life, from the safety of foods and drugs to the miles per gallon our automobiles achieve to when we can drop out of school. has costs and limitations. 29 / 43

30 in Price Controls:Price Ceiling and Price Floors Price Ceilings For example, rent control. Exhibit Effects of a Price Ceiling 30 / 43

31 in Exhibit and Producer Surplus with Rent Controls If rent-control is so clearly welfare-reducing, why do we have it in practice? Winners and Losers under rent-control? 31 / 43

32 in Price Floors Price floor represents a lower limit on the price of the product or service. 32 / 43

33 in Why is there a shortage of babies available for adoption? Why is there a shortage of organs available for transplant? Why is there a shortage of spaces in magnet, or accelerated, public schools? 33 / 43

34 in 10.3 Although many government interventions have well-defined, worthy objectives and some of them are essential for the proper functioning of markets, they also create a range of inefficiencies. Those include deadweight losses of taxation or inefficiencies from price controls or direct regulation. Also include a broader set of inefficiencies associated with government interventions, sometimes called government failures. 34 / 43

35 in Direct Costs of Bureaucracies Every government program needs bureaucrats and bureaucracies to monitor its implementation. Bureaucrats have to be paid. y are also taken out of the productive sectors of the economy. In the absence of regulation, these workers would have been productive in other jobs, and this is the opportunity cost of government work. allocation of time and talent of individuals to bureaucracy is an important cost of government. cost is increased by the fact that bureaucracies sometimes (?) don t function efficiently. 35 / 43

36 in Corruption Corruption refers to the misuse of public funds or the distortion of the allocation of resources for personal gain. Foe example, in the last 60 years, more than $1 trillion has been transferred from developed countries to Africa, only 5% to 15% reaches the recipient! Why evaluating government policies, those costs of government have to be considered. 36 / 43

37 in Underground Economy underground economy, also referred to as the black market, includes activities where income taxes are not paid, as well as illegal activities, such as drug dealing and prostitution. Problems underground economy generates: Undermine the ban. Put legitimate business at a disadvantage. To compensate for the lost revenue, governments must levy higher taxes. Resources spent by criminals trying to evade the law and by authorities trying to catch criminals are not effective use of society s resources. 37 / 43

38 in 10.4 Exhibit Equity- Trade-off Where do you want to be along the curve? 38 / 43

39 in 10.5 sovereignty is the view that choices made by a consumer reflect his or her true preferences, and outsiders, including the government, should not interfere with these choices. is the view that consumers do not always know what is best for them, and the government should encourage or induce them to change their actions. 39 / 43

40 in Social Security system in the, which forces individuals to save for old age, is born out of paternalism. Laws that ban substance abuse are also motivated, in part, by paternalism. By contrast, in a world with no externalities, consumer sovereignty wold allow individuals to consume as many drugs as possible, even if they are addictive and potentially harmful. 40 / 43

41 in Debate should help consumers make choices because: Some decisions are very complex and individuals don t have enough information. Some mistakes result form the fact that individuals are not used to making decisions of a certain type. If an individual behavior benefits the larger society, the government should encourage that behavior. 41 / 43

42 in s should be allowed to make their own choices because: How can the government (or some group of people) know what s good for us? How can we trust the government to really have our interests in mind? How can we distinguish between differences in opinions and preferences and those cases in which people really are making mistakes? 42 / 43

43 in Q: What is the optimal size of government? This is a difficult question to answer. An economy needs some amount of law and order, some national defense, some regulation, and so on. Two specific areas to make our general point to think about the optimal size of government. 1. A major efficiency loss of taxation is deadweight loss. 2. government typically operates in a slow-moving manner. A significant drag on the economy can result if regulators can not move swiftly in response to changing market conditions. 43 / 43