Economics 832 Lecture 11. Hale Ramsey March 1, 2018

Transcription

1 Economics 832 Lecture 11 March 1, 2018

2 Thought for the Week The hardest thing in the world to understand is income taxes. Albert Einstein ( ), Physicist Widely attributed Page 1

3 Lecture Topics Personal Income Tax (Rosen, 2012, Ch. 17) Canada s system The Basic Structure Definition of Income Tax Expenditures: Deductions / Tax Credits Statutory Rate Structure Inflation and Taxes Global vs Territorial Systems Democracy and Tax Systems Page 2

4 Canada s Personal Income Tax System Page 3

5 The Basics Largest single source of tax revenue for most governments SK Budget: $3.5b (52% of $6.8b total tax revenue; 24% of total revenue) Historically, has increased as share of gov t revenue and GDP (Rosen, 2012, tables 17.1 and 17.2) Large efficiency, equity, admin., compliance, and political effects Page 4

6 The Basics Basic taxable unit: individual Liability generated by Canadian residency for ½ year (183 days) Taxed on worldwide income Annual filing of return required Due April 30 Creates lag in government budgetary revenue forecasting Page 5

7 The Basics Single collection process (CRA) Creates efficiencies in collection, administration and compliance Different provincial definitions of taxable income tax on tax (prov tax = % of fed tax) to TONI (each prov has own Tax ON Income ) circa 2000/2001 Generates additional complexity and equity considerations Page 6

8 The Basics Legal definition of income and calculation of tax payable (Rosen, 2012, Fig. 17.1) Defined by Income Tax Act Haig-Simons definition of income Income = consumption + Δ (net wealth) Used in public finance economics Horizontal equity Economic efficiency Page 7

9 The Basics Haig-Simons definition of income Impractical to use strict definition Large administrative and informational requirements But, strong theoretical reasons not to ignore completely Several Canadian and U.S. tax reform commissions (recommendation panels) and actual tax reforms refer to H-S principles (broad tax base and equal treatment of individual s income sources) Page 8

10 Tax Expenditures Although the primary purpose of taxation is to raise revenue, governments also attain some of their social and economic goals by reducing the taxes paid by certain taxpayers. These reductions are commonly called tax expenditures and include such measures as exemptions, deductions, tax credits, preferential tax rates or deferrals. Each provides special or preferential treatment to certain taxpayers or to certain types of activity. Saskatchewan Budget, p.60 Page 9

11 Tax Expenditures Frequently used where direct spending is impractical to achieve a policy objective Example: cannot efficiently channel spending to individuals that make RRSP contributions or pay tuition More efficient to create tax expenditure and allow individuals to self-identify Same effect on budget balance Page 10

12 Tax Expenditures Two major classes: Deductions from total income Credits (reductions) in taxes owing Both alter relative prices Therefore, generate efficiency effects Same argument as application of a tax Both reduce tax revenue that would otherwise accrue to the government Page 11

13 Tax Expenditures Tax credits vs. deductions Deductions: value depends on taxpayer s marginal rate higher income taxpayers benefit more per dollar of a deduction Reduces tax system progressivity Tax Credits: Value is independent of a taxpayer s marginal tax rate Page 12

14 Tax Expenditures Tax Credits vs. deductions Deductions reduce effective price of affected good by different percentages for different taxpayers Tax credits reduce effective price of affected good by same percentage across all taxpayers Deductions can be converted to tax credits (1987 tax reforms; see Rosen, 2012, pp ) Page 13

15 Tax Expenditures How much is spent on tax expenditures (TE)? Some governments provide estimates Federal estimates: See Sask Budget, pp.62-3 Estimates are not usually additive Due to behavioural changes and tax base interactions (elasticities, comp./subst.) Lost revenue Σ TE Page 14

16 Tax Expenditures How to estimate foregone revenue? Estimates represent deviations from some non-te tax system Benchmark tax system not clearly defined in theory or practice Foregone revenue can be estimated in many ways: GE, PE models Tax-point analysis Page 15

17 Tax Expenditures Tax point estimation Simple method for determining the change in tax revenue for a given change in the rate of a tax expenditure Value of tax point = tax revenue / tax rate (in %) Example: tax revenue = $500m; tax rate = 5%; each tax point is worth $100m Known theoretical problems, but easy to convey to the general public Page 16

18 Rate Structure Basic PIT statutory marginal rate structure is relatively simple 3 income brackets; 3 rates Marginal rate rises; average rate rises Complexity introduced by other taxes, deductions and credits built into the system Leads to rising/falling statutory marginal rate structures (Rosen, 2012, pp.363-4) Page 17

19 Effects of Inflation Statutory bracket structure defined in nominal terms Inflation increases nominal prices and wages During inflationary periods, nominal incomes rise, but real incomes rise more slowly; leads to bracket creep Bracket indexation can be an offset to bracket creep Page 18

20 Territorial vs. Global Systems Territorial: Tax liability determined by country of residence (Canada) Global: Tax liability determined by country of citizenship (U.S.) Efficiency and equity pros/cons on both sides (Rosen, 2012, pp.372-3) Territorial easier to enforce Page 19

21 Democracy and Tax Systems Voter preferences are a principal determinant of tax policy In theory, the tax system will reflect the efficiency/equity preferences of the majority of voters In practice, factors such as system complexity, fiscal federalism and special interests make tax policy debate/discussion difficult Page 20

22 The End Questions? Page 21