Effects of Taxes

8 Key excerpts on "Effects of Taxes"

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  eBook - PDF

  Taxation: Policy and Practice (2021/22) 28th edition

  • Andy Lymer, Lynne Oats(Authors)
  • 2021(Publication Date)
  • Fiscal Publications

    (Publisher)

  Although using taxes to affect people’s behaviour is common, determining exactly how a tax change will affect behaviour is very difficult to predict reliably and governments can sometimes get it wrong. In this chapter we will expand on some of the concepts we looked at in Chapter 3 to help us understand the effects of taxation on the economy generally (i.e. macro effects). We will then look at a number of other ways in which the tax system in the UK affects the decisions made by individual taxpayers (i.e. micro effects). We will introduce some new economic concepts that help us understand the effect of taxation on society. 14 14 Impacts of the UK tax system 444 At the end of this chapter you will be able to discuss the:  concepts of tax incidence and excess burden;  distorting effects of UK taxation on the decisions made by individuals, businesses and companies;  problems of achieving fiscal neutrality.  the concept of tax expenditures; and  the impact of tax on decision making The incidence of taxation 14.2 In Chapter 3, we looked at the burden of taxation in terms of the tax rate structure. Now that you know more about the UK tax system in current operation, we can extend that analysis by looking more closely at a wider range of issues relating to the incidence of taxation. The tax system affects many people – both directly and indirectly. The formal incidence of a tax falls on those who must actually pay the tax while the effective incidence of tax falls on everyone whose wealth or income is reduced, or purchase opportunities changed, in any way by the tax. This will often include people other than those who directly pay the tax. While it is often easier to identify where most of the formal incidence of tax will fall, it is, in practice, often impossible to identify the full effective incidence of tax. However, to plan for the effects of tax changes this wider incidence should ideally be taken into account.

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  Taxation: Policy and Practice (2023/24) 30th edition

  • Andy Lymer, Lynne Oats(Authors)
  • 2023(Publication Date)
  • Fiscal Publications

    (Publisher)

  Although using taxes to affect people’s behaviour is common, determining exactly how a tax change will affect behaviour is very difficult to predict reliably and governments can sometimes get it wrong. In this chapter we will expand on some of the concepts we looked at in Chapter 3 to help us understand the effects of taxation on the economy generally (i.e. macro effects). We will then look at a number of other ways in which the tax system in the UK affects the decisions made by individual taxpayers (i.e. micro effects). We will introduce some new economic concepts that help us understand the effect of taxation on society. 14 14 Impacts of the UK tax system 444 At the end of this chapter you will be able to discuss the:  concepts of tax incidence and excess burden;  distorting effects of UK taxation on the decisions made by individuals, businesses and companies;  problems of achieving fiscal neutrality.  the concept of tax expenditures; and  the impact of tax on decision making The incidence of taxation 14.2 In Chapter 3, we looked at the burden of taxation in terms of the tax rate structure. Now that you know more about the UK tax system as it currently operates, we can extend that analysis by looking more closely at a wider range of issues relating to the incidence of taxation. The tax system affects many people – both directly and indirectly. The formal incidence of a tax falls on those who must actually pay the tax while the effective incidence of tax falls on everyone whose wealth or income is reduced, or purchase opportunities changed, in any way by the tax. This will often include people other than those who directly pay the tax. While it is often easier to identify where most of the formal incidence of tax will fall, it is, in practice, often impossible to identify the full effective incidence of tax. However, to plan for the effects of tax changes this wider incidence should ideally be taken into account.

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  The Distributional Effects of Government Spending and Taxation

  • D. Papadimitriou(Author)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  First, the public provisioning of goods and services exerts direct and indirect effects on household income via employment and output changes. For example, establishing a new public school yields jobs to individuals such as teachers and school staff, creates new demand for goods and services produced locally and elsewhere, and has ripple effects on employment and income. Second, tax and transfer payments incorporated in the budget may have indirect effects on household income by changing consumer prefer- ences, individual decisions regarding labor market participation, and busi- ness decisions on the location and scale of activity (Ruggles, 1991). Exclusion of these considerations is in line with the previous research into this question (Gillespie, 1965). 2 Most existing empirical studies aimed at answering the question 'how does government affect distribution' can be classified into two categories. Studies in the first category involve two steps in the allocation and distribution of taxes and government expenditures. First, assumptions are made regarding the incidence of various taxes on different categories of factor incomes and types of consumer expenditures, and also regarding on whose behalf government expenditures may be considered as being made. For example, a study may assume that taxes on corporate profits are borne entirely by those who earn property-type income and expenditures on public educa- tions are incurred exclusively on behalf of households with students enrolled in public educational institutions. Such incidence assumptions are generally derived from a specific theoretical framework, a combination of theoretical predictions and empirical findings from testing theoretical predictions, or, when theoretical arguments and empirical evidence are inconclusive, just plain arbitrarily.

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  Handbook of Public Economics

  • Martin Feldstein, A.J. Auerbach(Authors)
  • 1985(Publication Date)
  • North Holland

    (Publisher)

  Chapter 5 THE EFFECTS OF TAXATION ON SAVINGS AND RISK TAKING AGNAR SANDMO* The Norwegian School of Economics and Business Administration, Bergen 1. Introduction The effects of taxation on the volume and composition of private saving has traditionally been considered one of the central questions in public finance. This is hardly surprising. From a policy point of view one can point to a series of arguments for the importance of the problem. If alternative tax systems can lead to different rates of private saving, then the choice between them should take into account the short-run effects on employment and inflation, the medium-term effects on the rate of growth, and the long-term effect on the capital intensity of the economy. These are basically issues of the efficiency of resource allocation, but distributional policy is also involved. A tax policy designed to encourage saving may transfer income from “workers” to “capitalists” and from the present to future generations. Evidently, there are all sorts of tradeoffs to consider in policy design. Although it is clear that much of the interest in this particular question is derived from a concern with policy problems, it is important to emphasize the conceptual distinction between positive and normative issues. Thus the question of whether an expenditure tax will lead to a lugher or lower level of private saving than an equivalent income tax is a positive one. Whether the answer is one or the other does not in itself have any implications for tax policy. It is only when we introduce criteria for social welfare or efficiency that we can begin to consider the normative question of the desirability of an expenditure tax. In principle, savings decisions can be made by consumers, firms and govern- ments. The tradition in the literature has been to concentrate on consumer decisions and to take the personal saving rate as being the main determinant of the overall rate of saving.

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  Implementing a US Carbon Tax

  Challenges and Debates

  • Ian Parry, Adele Morris, Roberton C. Williams III(Authors)
  • 2015(Publication Date)
  • Taylor & Francis

    (Publisher)

  A third potential pro-growth use for carbon tax revenue would be to fund particularly valuable government spending. If the government has set the mix of taxes and spending efficiently, then the gains from funding an additional dollar of spending will equal the gains from a dollar of tax cuts. But again, it is unlikely that the right balance is struck due to lack of information on the benefits of extra spending programs, let alone the influence of constituencies in the determination of spending levels.

  Relatively few studies model the effects of using environmental tax revenues to fund additional public spending, and we are not aware of any that go beyond purely theoretical models.20 Moreover, the broader literature on the effects of public spending is also relatively thin. Nonetheless, that literature does give some indications of what types of spending could give a particular boost to longer-term economic activity.

  Areas of public spending that seem particularly promising are research, education, and infrastructure (see Chapter 12 for discussion of the apparently high return from transportation infrastructure). The common thread among these is that they all represent investments that can boost the future productive capacity of the economy. In effect, increasing spending in these areas represents a boost to the stock of capital – but in the form of knowledge, human capital, and public infrastructure, rather than private physical capital.21

  However, because we are going beyond the existing literature on environmental taxes – and because the benefits of public spending are inherently difficult to measure – this section is necessarily quite speculative. Further research in this area could be quite valuable (though also quite difficult).

  2.C Environmental effects on economic growth

  A third channel through which carbon taxes may affect the economy is via their environmental effects (primarily in mitigating potential damage from climate change, but also reducing emissions of other pollutants). Climate change is predicted to have a wide range of effects that might influence the economy. Climate can directly affect economic productivity, particularly for agriculture. Sea level rise can damage coastal property and/or require defenses to protect it. To the extent that imposing a carbon tax can mitigate those and other effects, it can influence the economy.22

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  Full Industry Equilibrium

  A Theory of the Industrial Long Run

  • Arrigo Opocher, Ian Steedman(Authors)
  • 2015(Publication Date)
  • Cambridge University Press

    (Publisher)

  7 The effects of taxation In an excellent textbook, Atkinson and Stiglitz (1980, pp. 160–61) distinguish between five main points of view on tax incidence, one of them being the incidence on the ‘factors of production’, which they par- ticularly emphasize. Broadly speaking, the present chapter is entirely devoted to this latter point of view. By the zero-profit condition, a tax always reduces the real primary input prices, taken together, in terms of the output of the taxed industry; what, then, determines the size of this effect? How can we distinguish between it and the specific effects on each primary input? Do real wages also decrease in terms of untaxed commodities? Are uniform tax rates neutral for relative commodity prices? Do non-uniform tax rates determine a predictable change in the price structure? In this chapter we shall analyse these and other related questions in the framework of the FIE analysis developed above. A series of fundamental studies of tax incidence are focused on the changes in equilibrium input and output prices and in equilib- rium input and output quantities (e.g. Musgrave, 1953; Harberger, 1962; valuable surveys are Atkinson and Stiglitz, 1980, chapter 6; Fullerton and Metcalf, 2002); in our FIE analysis we adopt a strictly industrial standpoint and derive all our conclusions from the double equality between prices and average and marginal costs including taxes and from the uniformity of input prices, net of taxes, in the various industries. Of course, our approach involves ignoring a series of aspects which traditionally belong to taxation theory. First, even though taxes are in fact a means to ‘purchase’ public goods and services, we follow many partial equilibrium studies of tax incidence in ignoring the distribu- tion of the tax proceeds; more generally, the welfare implications of taxation (important as they are) are outside the scope of the present analysis.

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  Public Finance in Democratic Process

  Fiscal Institutions and Individual Choice

  • James M. Buchanan(Author)
  • 2014(Publication Date)
  • The University of North Carolina Press

    (Publisher)

  He will recognize that he will not, personally, be required to pay out funds to the fisc in “exchange” for public goods. Revenues are collected only from sellers. Only if the individual should serve in some functional capacity as a retailer will he be conscious of the direct fiscal transfer. The individual who does not serve in such capacity must try to estimate the differences in his market opportunities before and after the tax. As suggested, he may accept the hypothesis that factor prices will fall relative to product prices. However, this general effect of the tax will never be uniform over all markets either functionally, spatially, or temporally. Recognizing this, the individual must try, as best he can, to predict the effects of the tax on his own income shares, in real value terms. These effects will depend upon the particular supply conditions characterizing the markets for his own productive services and upon the organization of the industry utilizing these services, among many other things. What the individual must predict here are the behavioral responses of many decision-making units in the economy, other than himself. The interpersonal interdependence, the externality, that was shown to be significant even under proportional income taxation, becomes enormously complex under general sales taxation. The behavior of other persons and firms, not only in earning income, but in apportioning resources, in pricing products and services, in purchasing final output, in adjusting to price changes, is necessarily relevant to the effects of the tax on the individual. At best, predictions amount to no more than rather inaccurate “guesses.” Investment in knowledge must surely stop far short of even the economist’s level of prediction. The range of uncertainty that must face the individual when he makes a final fiscal decision must be extremely wide, and most persons are likely to rely on very crude rules-of-thumb, perhaps made available to them through press media and stated in very simple averages.

  Despite all of the difficulties involved the individual must, nonetheless, choose (or acquiesce in the choices made for him by others). A demand or marginal evaluation schedule for the public good may be derived in a reasonably straightforward manner, since presumably the individual can make some rough estimate of the benefits he secures. On the tax or cost side, however, he may either grossly underestimate or grossly overestimate the tax-price that this institution imposes on him. No particular direction of bias seems indicated by this analysis. Relative to the model of invariant tax-price, the individual under sales taxation may choose more or less public spending. At a later stage of discussion, when the possibility of fiscal illusion is introduced, this conclusion will be re-examined.

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  The Economic Theory of Fiscal Policy

  • Bent Hansen(Author)
  • 2014(Publication Date)
  • Taylor & Francis

    (Publisher)

  The previous chapter was entirely devoted to a presentation of the intertemporal theory of the disposal of household income in a way suitable for the study of certain effects of taxation. In debates on fiscal policy, discussion has always centred on the question of how various forms of taxation affect consumption and saving; it is generally held that the tax system ought to be such that saving is hindered as little as possible. The motives behind this opinion are very varied. For instance, there is the point of view, that saving determines the amount of investment and thus determines the development of the standard of living in the long run. The most usual point of view is, however, that the function of taxation is to provide the State with goods and services, and that taxation fulfils this function by reducing demand for consumer goods from the households. It is then natural to choose those taxes which achieve this end most effectively; for in this way resources are released for use by the State with the least possible burden of taxation.

  In the literature on public finance there has, as far as I know, been no systematic analysis of this problem. Consequently, it seems necessary to concentrate investigations of the effects of fiscal policy on household planning upon this point. The present chapter is thus devoted to an investigation of, and a comparison between, the effects of direct and indirect taxation on the planned consumption and saving of households. Not all direct and indirect taxes are dealt with here. As a matter of fact, we shall for the present let direct taxation be represented by a proportional personal income tax,1

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