Taxation: Criteria for Evaluating Revenue Options Troy University PA6650- Governmental Budgeting Chapter 7.

Taxation: Criteria for Evaluating Revenue Options

Troy University

PA6650- Governmental Budgeting

Chapter 7

Taxation

• Governments exercise their sovereign power to collect coercive payments…taxes…rather than by selling products or services

• Type and amount are determined through political processes

Overview

• 75% of income from taxes levied on:– Income– Purchases or sales– Property ownership or transfer

• 25% from miscellaneous revenue– Lotteries– Interest on invested funds– Intergovernmental revenue

Overview of Taxation Systems

• Separation of revenue sources by level of government

– Federal level relies mostly on individual income tax (65% of revenue) and corporate income taxes (10%) and there is no federal General Sales Tax. Some federal excise taxes(motor fuels), customs duties, etc. No federal property tax.

– States use individual income taxes (41 states) and corporate income taxes (44 states) and sales taxes on goods and services (45 states)

– Localities use property taxes and some income taxes

Comparison to Other Countries

• Page 297 of text

• Notice the Scandinavian Countries

• Mexico, Korea

So You Think You’re Being Taxed?

TAX FREEDOM DAY for 2007 is April 30

So You Think You’re Being Taxed?

So You Think You’re Being Taxed?

Exercise

• Create a list of the taxes we pay

Standards For Tax Policy

• The primary goal of taxation is to transfer control of resources from one group in the society to another and to do so in ways that do not jeopardize, and may even facilitate, the attainment of other economic goals

• Taxation shifts purchasing power among groups

• Taxation shifts control of purchasing power from private sector to public sector

Adam Smith’s Tax Maxims

• Everyone should contribute proportionally

• Clearly defined amount, not arbitrary

• Timing and method should be convenient

• Minimum impact

Equity

• Standard equity methods– Benefits Received (user fees, motor fuels)– Ability to pay (income, property taxes)

• Other equity approaches (Wildavsky)– Get what you pay for?– Equal access?– Equal results?

Equity

• HORIZONTAL EQUITY– Equal treatment of taxpayers with equal ability

to pay

• VERTICAL EQUITY– Relative tax burden on taxpayers with different

ability to pay• REGRESSIVE – lower rates in high ability groups• PROGRESSIVE – higher rates in high ability groups• PROPORTIONAL = same rates in all groups

Who Really Pays?

• IMPACT, SHIFTING, and INCIDENCE (p.305)

• How businesses respond to taxation– Forward shifting – higher prices to customers for

product– Absorption – lower return to owners of the business– Backward shifting – lower payment to suppliers of

resources to the business

Adequacy ofRevenue Production

• Taxes should be socially acceptable

• Some taxation is punitive (cigarettes, alcohol)

• TAX REVENUE EQUATION• Tax Yield = R• Tax rate = t• Tax Base = B• R = t x B

• LAFFER CURVE – rate-revenue curve

Adequacy ofRevenue Production

• Short-run (cyclical) and Long-run (secular) issues– CYCLICAL ADEQUACY (provides good

revenue stability during boom-bust cycles)

• Income Elasticity – a 1% increase in income yields > 1% spending is elastic

• Motor fuel and tobacco demand are inelastic

Collectability

• Must keep collection costs low

• Complexity costs more

Economic Effects

• Work v. leisure (work less due to taxes)

• Business operations (relocating or curtailing ops)

• Shopping, purchases, location (out-of-state purchasing)

• Personal management (behavior due to tax breaks, like baby’s birth date or SUVs)

• Productive investment (unproductive tax shelters)

• Savings (less money saved)

State and Local Taxes and Economic Development

• Competitive rates with neighbors

• Tax breaks

Transparency

• Adoption – laws should be adopted in an open, legislative process

• Administration – objective and explicit criteria

• Compliance requirements – understandable tax computation

• Amount of payment – clearly defined and known

Taxes and Externalities

• Regulations, pollution rights, subsidies, taxes

• Two types of tax instruments– Emission Taxes ($20/lb of sulphur dioxide)– Indirect taxes ($1/ton of coal burned)

Conclusion

• Taxes on income, taxes on ownership and ownership exchange, and taxes on purchase or sales

• Taxes are involuntary

• Taxes can be evaluated on several criteria• Equity (horizontal and vertical)• Adequacy (stability)• Collectability• Transparency• Economic effects