The Economics Of Taxation

9 Key excerpts on "The Economics Of Taxation"

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  eBook - ePub

  Handbook of Public Sector Economics

  • Donijo Robbins(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  As shown in this chapter, consumer behaviors reflect the tax code in a myriad of ways, which in turn influence the revenues needed to maintain the programs and services that citizens need most. From increased spending and income reporting, to savings behaviors and marital status, tax policies and the principles of taxation involve more than the efficient collection of revenues. Rather, taxation and tax reform involve considerations of equity, social policy and income redistribution — public policy issues, which continue to be ripe for further scholarly investigation. Finally, although the future of the tax system and tax rates is undoubtedly one of life’s uncertainties, we can all rest assured that paying taxes is not.

  References

  1. Aaron H.J., Pechman J.A. Introduction and summary. In: Aaron H.J., Penchman J.A., Eds. How Taxes Affect Economic Behavior. Washington, The Brookings Institution, 1981, pp. 5–25.
  2. Agell J., Persson M., Sacklen H. Labor Supply Predication When Tax Avoidance Matters. FIEF Working Paper Series 1999, No. 157.
  3. Allingham A.G., Sandmo A. Income tax evasion: a theoretical analysis. Journal of Public Economics , 1:323–338, 1972.
  4. Alm J. What is an “optimal” tax system? In: Slemrod J., ed. Tax Policy in the Real World. Cambridge, U.K.: Cambridge University, 1999, pp. 363–379.
  5. Alm J., Whittington, L. Shacking up or shelling out: income taxes, marriage and cohabitation. Review of Economics of the Household I, 169:186, 2003.
  6. Arrow K. Social responsibility and economic efficiency. Public Policy , 21:303–317, Summer 1973 in Baker S. and Elliott C., Eds. Readings in Public Sector Economics. Lexington, MA: D.C. Heath and Company, 1990, pp. 26–37.
  7. Atkinson A.B., Stiglitz, J.E. Lectures on Pubic Economics. New York: McGraw-Hill, 1980.
  8. Auerbach A.J. Measuring the impact of tax reform. In: Slemrod J., Ed. Tax Policy in the Real World. Cambridge, U.K.: Cambridge University, 1999, pp. 353–361.
  9. Auerbach A.J., Hines J.R. Taxation and economic efficiency. In: Auerbach A. and Feldstein J., Eds. Handbook of Public Economics . Amsterdam: North-Holland/Elsevier, 2002.
  10. Auerbach A.J., Burman L.E., Siegel J.M. Capital gains taxation and tax avoidance: new evidence from panel data. In: Slemrod J., Ed. Does Atlas Shrug? The Economic Consequences of Taxing the Rich.

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  Public Sector Economics

  • Richard W Tresch(Author)
  • 2021(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  The British economists following Adam Smith who studied the government sector, and who had the most influence on U.S. economists, focused almost exclusively on tax theory and policy until the middle of the 20th century, when public expenditures began to receive equal attention and the title public finance began to give way to public sector economics. One of the central issues of public finance has always been the question of tax inci-dence: Who bears the burden of a particular tax or set of taxes? Economists distinguish the incidence – the burden – of a tax from the impact of a tax, which refers to the agents on whom a tax is levied, the agents who write the tax checks to the government. The incidence and impact of a tax may differ because governments tax market transactions or marketable commodities, so that markets naturally respond to taxation. For instance, a sales tax is levied on business firms; they write the tax checks to the government and thus bear the impact of the tax. But they may be able to avoid some, or all, of the inci-dence of the tax if they can pass the tax on to consumers in the form of higher prices. If so, then the consumers bear some, or all, of the incidence of the tax even though they do not literally pay the tax. The ultimate interest in economic analysis is the incidence of a tax, not its impact. The professional literature on tax incidence is voluminous, perhaps the largest in all of public sector economics. It is a difficult literature for students to tackle, and not only for it sheer size. It also happens to contain many different approaches to measuring inci-dence, both empirical and theoretical, and this is bound to be confusing at first pass. The study of tax incidence is ultimately an empirical exercise. Its goal is to determine the burden of the various taxes that governments use so that public officials can make reasoned equity judgments about them.

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  A Course in Public Economics

  • John Leach(Author)
  • 2003(Publication Date)
  • Cambridge University Press

    (Publisher)

  Taxation and Efficiency It is inevitable that people will try to avoid paying taxes. These attempts are, in the aggregate, futile – the government ultimately does raise the revenue that it wants – but they do have important economic implications. The adjustments that people make in their attempts to dodge taxes reduce economic efficiency. Governments have a role to play in the provision of public goods, and in the reg-ulation of externalities and “increasing returns” industries. In each of these roles, the government’s activities have the potential to reduce economic inefficiency. But these activities must be funded through taxation, and taxation generates other inefficiencies. The social benefits of additional government expenditures will at some point fall short of the social costs of the additional taxation required to finance them, so that the in-tervention reduces welfare instead of raising it. The welfare gains of intervention will be maximized if the government targets its expenditures to generate the greatest social gains, and designs its tax system to minimize the damage done by it. These issues are discussed in the next few chapters. Governments also, to greater or lesser degrees, attempt to reduce economic dispari-ties by redistributing income. A major element of any redistributive policy is the design of the tax system, and the welfare costs associated with taxation limit the government’s ability to redistribute income, or its willingness to do so. The relationship between economic efficiency and income distribution is discussed in the last part of the book. 239 240 16 Taxation The things that people do to avoid paying taxes alter the allocation of resources in ways that reduce economic welfare. To see this, compare the following situations: 1) On the morning of the first of January, you discover that $100 that you had in your pockets is no longer there.

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  Taxation by Political Inertia

  Financing the Growth of Government in Britain

  • Richard Rose, Terence Karran(Authors)
  • 2018(Publication Date)
  • Taylor & Francis

    (Publisher)

  It is attractive for politicians averse to raising tax rates and broadening the tax base to rely upon economic growth rather than increased tax effort to produce more tax revenue. Each increase in tax effort induces a disproportionate decrease in take-home pay. If a government claims 40 per cent of the national product in taxation, an increase in tax effort to 45 per cent will reduce the private-sector share by 8.3 per cent (that is, from 60 to 55 per cent).

  The reasons why government favours economic growth are multiple: in a booming economy there is a lot more money to spend, and fewer political difficulties. Moreover, as economic growth is cumulative, in the course of a five-year Parliament an annual growth rate of 2.5 per cent will, by a process of compounding, increase the national product by 16 per cent, and total tax revenue with it.

  Viewing the economy as a source of tax revenue imposes a one-dimensional perspective upon a multi-dimensional set of activities. Models of the economy designed to illustrate processes important in economic theory often give very little attention to taxation. From a broad economic perspective, issues of prices and wages, investment and growth and foreign exchange rates appear of pervasive importance. Taxation appears only as an intervening variable in the economic system as a whole (Wallis et al., 1984). In many contexts, taxation can be seen as a fiscal instrument used for ulterior, non-revenue ends. Economic activities are reduced by tax laws to such categories as taxable income, or goods liable to value added tax. The flow of income and expenditure through the economy is not the concern of tax authorities, whose primary job is to divert a portion of that flow to the fisc through appropriate administrative means.

  Certainty and Predictability

  Government is concerned with the certainty of revenue and, because budgets are statements about future taxing and spending, about the predictability of revenue. A good tax is not only easy to collect but also will yield an amount of revenue that can be predicted when forecasts are required for the budget in the year ahead. Otherwise the Treasury may make policies based upon misleading assumptions about the public-sector borrowing requirement, the difference between the forecast total expenditure and total revenue.

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  Public Sector Revenue

  Principles, Policies and Management

  • Alberto Asquer(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  3 The design of tax systems        

  Optimal tax theory

  Optimal tax theory is an area of inquiry within the field of economics that is concerned with the design of tax systems that maximise a social welfare function. The issue is posed in terms of a social planner that takes the wellness of individuals under consideration (in the analytic form of utility functions) when choosing which taxes should be levied and at what rates. The analysis can be posed in different terms, for example depending on whether individuals are assumed to hold homogeneous conditions and preferences and whether the social planner considers some allocations of economic benefits (e.g. a more equitable distribution of income and wealth) more desirable than others. In general, optimal tax theory aims to find solutions to the issue of designing a tax system that fulfils Pareto efficiency criteria (that is, equilibria where no one’s utility can be improved without decreasing the utility of someone else) (Sandmo, 1976).

  One of the early efforts to solve the optimal tax problem originated from the work of Ramsey (1927), who focused on the taxation of commodities. Drawing on the analysis of the role of price elasticity of demand in the loss of consumer surplus (the incidence of taxation that was discussed in the previous chapter), Ramsey (1927) argued that commodities should be taxed at an inverse proportion to their price elasticity of demand; that is, commodities with more inelastic demand should be taxed more than those with less elastic demand. The result, however, is of limited practical implementation because it does not address the variety of economic conditions and events that can be subjected to taxation and it does not take into account heterogeneity across taxpayers. Moreover, Diamond and Mirrlees (1971) argued that intermediate goods should not be taxed, and Atkinson and Stiglitz (1976) held that optimal taxes are equal across all final consumption goods (that is, all goods that are sold to consumers as final products).

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  Handbook on Taxation

  • W.Bartley Hildreth, W. Bartley Hildreth(Authors)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  3

  Economic Principles of Taxation

  James A. Richardson Louisiana State University, Baton Rouge, Louisiana W. Bartley Hildreth Wichita State University, Wichita, Kansas

  In the private economy a person decides how much work he or she will undertake, and for that effort the person gets a wage. The person then decides how to use his or her salary and wages—either to buy food, clothing, shelter, recreation, or some other commodity or service, or not to buy anything for current consumption, but rather to save his or her income for future use. In each of these transactions, there is no debate about who pays, how much is paid, or who gets the direct benefit of the purchase. Economic analysis provides explicit answers to how much of each private product or service should be produced, the price that will lead to the same amount of good or service being consumed as that which is being produced, and who will get to consume the good or service. There is no ambiguity in the decision-making process or in the decisions that are ultimately reached.

  Economic analysis is not necessarily as definitive as compared to the private market in determining how much should be produced either when the goods and services are produced by a public agency or when the government purchases the good or service from a private company but provides it to the general public. Economic analysis is not as definitive in determining exactly who should receive the goods and services, either produced by the government or purchased by the government to be provided to various citizens, as compared to such decisions in the private market. Similarly, economic analysis is not nearly as definitive when it comes to deciding exactly who should pay for these goods and services being produced by the government or being purchased by the government from a private company for distribution to private citizens. The answers to the basic questions to which any economic system has to respond—what to produce, how much to produce, how to produce it, and for whom it should be produced—become ambiguous in dealing with the government sector. The political process is instrumental in reaching decisions regarding how much of the nation’s resources are used for governmental functions and who pays for these activities.

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  Making Policy Work

  • Peter John(Author)
  • 2011(Publication Date)
  • Routledge

    (Publisher)

  Chapter 4 ). The other advantage is that taxation may be economically efficient because if the desired action is priced properly, then it allows other decision-makers, such as consumers and firms, to organise themselves in response to the new set of costs. If a non-desired activity, such as a short-hop plane ride, is priced to include the social cost, somebody who really needs to do it for personal or business reasons still can – it is just that the cost has been allowed for. This would be more efficient than banning internal flights in the United Kingdom, for example. The idea is that the economy and personal welfare do not lose out disproportionately from environmental regulation.

  The problem with taxes is that it is not easy to control exactly what happens as a result. It is up to the individual or organisation to respond to the incentive, which is hard to tie to a preferred form of behaviour or to ensure the response is not just strategically designed to do the minimum to get the tax benefit (though this is not just a problem with taxes). Also individuals may be inattentive to the incentives of the tax system. Much work in economics shows the lack of knowledge individuals have of their marginal tax rates (Lewis, 1982 ). If individuals do not know what their tax rates are, this would effectively nullify the effects of this instrument. In fact, people are aware of some tax rates. Research shows that tax rules tend to have an effect. For example, the timing of marriages has been found to be based on changes in marginal tax rates, as a study comparing changes in tax policy in Canada and England and Wales shows (Gelardi, 1996 ). But individuals often respond as much to how the message is framed as the tax itself (McCaffery and Baron, 2004 ). The response depends on the presentation of taxes, in particular whether they are visible or not, which relates to the debate in Chapter 6 on information. For example,

  Chetty et al

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  Modern Public Economics

  • Raghbendra Jha(Author)
  • 2009(Publication Date)
  • Routledge

    (Publisher)

  11 The theory of tax incidence DOI: 10.4324/9780203870044-11

  Key concepts: tax incidence in partial and general equilibrium; output and factor substitution effects; fair wages; rate of return regulation.

  11.1 Introduction

  Tax incidence measures the sharing of the tax burden between different groups. When a sales tax is imposed on a commodity, part of the tax may be passed on to consumers so that the burden of the tax is shared by consumers and producers. In this case we say that the incidence of the tax is on producers as well as consumers. If the tax cannot be passed on to consumers then the incidence of the tax would be on producers alone. If a wage tax is imposed and the supply of labor falls, the market clearing wage rate would rise and this would increase the cost of labor to producers. The impact of the wage tax and, hence, the incidence of the wage tax would be on workers as well as employers.

  The above two examples illustrate the important point that the measurement of tax incidence is model specific. In the first model, we are essentially carrying out a partial equilibrium exercise as depicted in Figure 11.1 . A specific tax is imposed on commodity x. The producer price of the commodity is q and the consumer price is p where

  Figure 11.1

  Commodity tax incidence in partial equilibrium

  11.1

  p = q + t

  where t is the rate of the specific tax. This is the vertical distance between the pre- and post-tax supply curves in Figure 11.1 . The consumer price rises from p0 (q0 ) to p1 . The producer price is ql and we have

  11.2

  p 1 = q 1 + t .

  As shown in Figure 11.1 , part of the tax burden is borne by the producer and part by the consumer. A moment’s thought would tell us that the proportions in which the tax burden is split up between producers and consumers would depend on the elasticities of supply and demand.

  In the second example, however, we are admitting general equilibrium

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  Social Policy Review 26

  Analysis and Debate in Social Policy, 2014

  • Farnsworth, Kevin, Irving, Zoë(Authors)
  • 2014(Publication Date)
  • Policy Press

    (Publisher)

  65 FOUR The political economy of taxation in the 21st-century UK Sally Ruane and David Byrne Introduction Taxation is always on the political agenda but, in a context of a government programme of deficit reduction principally through cuts to the welfare state rather than tax rises, it is notable that ‘fair taxation’ has become a major political issue. It has been taken up not only by political activists and trade unions but also by the House of Commons Public Accounts Committee in relation both to tax avoidance as an industry and to the abilities of particular transnational corporations to avoid paying corporation tax.While all the main parties endorse austerity, the extent to which paying tax seems to be a voluntary activity, both for very affluent individuals/households and corporations, has become a public scandal and source of genuine popular discontent. The aim of this chapter is to offer a class analysis of taxation and set out some existing proposals that could increase the progressivity and redistributive potential of the UK tax system. After an overview of the main taxes, the chapter will present a selective history of taxation, with a particular emphasis on the role of taxes in mediating the relationship of the propertied and labouring classes. It will then examine the functions of taxation from a political-economy perspective, and some of the means by which the tax system has been modified since the 1980s with the effect of reducing the relative contribution of the affluent and large corporations. Finally, it will outline some proposals that can contribute to addressing the enormous increase in inequality in the UK since the 1970s. The main UK taxes in 2012 First, we will consider what taxes are currently collected in the UK. Taking the forecasts for 2012/13 as a snapshot (Table 4.1 below), we see

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