17
Public Chapter Choice
Theory and the
Economics of
Taxation
McGrawHill/Irwin
Copyright2009byTheMcGrawHillCompanies,Inc.Allrightsreserved.
Chapter Objectives
Conveying economic preferences
through majority voting
Government failure
Tax philosophies and the tax
burden
Tax shifting, tax incidence, and
efficiency losses from taxes
17-2
Majority Voting
Can result in inefficiency
Over or underproduction of a
public good
Individuals think only of
themselves
Strength of preferences ignored
Interest groups
Logrolling
17-3
Majority Voting
Inefficient
Majority Yes Vote
Benefit; Tax
Benefit; Tax
Inefficient
Majority No Vote
$700
Adams
$350
$350
Benson
$300
$250
Benson
0
YES
NO
Conrad
YES
YES
$300
$200
$100
Conrad
NO
NO Wins!
Inefficient Since
MSB > MSC
$1,150 > $900
Adams
0
NO
YES Wins!
Inefficient Since
MSB < MSC
$800 < $900 17-4
Majority Voting
Paradox of voting
Paired choice majority voting
Flawed procedure
Outcome depends on vote order
Median voter model
Politicians appeal to the middle
Extremes pick the middle
Implications
17-5
Government Failure
Special-interest effect
Pork-barrel politics
Rent-seeking behavior
Clear benefits, hidden costs
Limited and bundled choice
Bureaucracy and inefficiency
Imperfect institutions
17-6
The Tax Burden
How should the tax burden
be apportioned?
Benefits-received principle
Ability-to-pay principle
Progressive tax
Regressive tax
Proportional tax
17-7
Types of Taxes
Personal income tax
Sales tax
Corporate income tax
Payroll tax
Property tax
17-8
Tax Incidence
Who really pays the tax?
Excise tax
Tax burden depends on elasticity
Inelastic vs. elastic
Efficiency loss of an excise tax
Deadweight loss
Depends on elasticity
Transfer of surplus to govt.
17-9
Tax Incidence of an Excise Tax
P
St
14
S
Price (Per Bottle)
12
Tax $2
10
8
6
4
D
2
0
5
10
15
20
Quantity
25
(Millions of Bottles Per Month)
Q
17-10
Tax Incidence
Why impose an excise tax?
Discourage consumption
Redistributive goals
Reduce externality
negative Burden of the excise tax?
Depends on elasticity
Availability of substitutes
17-11
Tax Incidence and Elasticity
Smaller efficiency loss with inelastic demand
P
P
St
Tax
Pe
P1
Pa
0
St
Tax
S
S
a
Pi
a
b
c
Q2
P1
Pb
De
Q1
Tax Incidence and
Elastic Demand
Q
0
b
c
Di
Q2 Q1
Q
Tax Incidence and
Inelastic Demand
17-12
Tax Incidence and Elasticity
Smaller efficiency loss with inelastic supply
P
P
Tax
Pe
P1
Pa
St S
Tax
St
a
S
b
Pi
P1
a
b
c
Pb
c
D
0
Q2
Q1
Tax Incidence and
Elastic Supply
D
Q
0
Q2 Q 1
Q
Tax Incidence and
Inelastic Supply
17-13
Efficiency Loss of a Tax
P
S
14
Tax Paid by
Consumers
Price (Per Bottle)
12
S
Tax $2
10
8
6
Efficiency
4
Loss (or
Tax Paid by Deadweight
Loss)
2 Producers
0
5
10
15
20
Quantity
D
25
(Millions of Bottles Per Month)
Q
17-14
Incidence of U.S. Taxes
Workers bear full burden of:
Social security tax
Medicare tax
Income tax
Burden of corporate income tax:
Stockholders (short run)
Workers (long run)
17-15
U.S. Tax Structure
Federal tax system progressive
State and local system is
regressive
Overall tax structure slightly
progressive
17-16
Taxes on General Consumption
Sales tax, excise tax, value-added tax
Percentage of GDP, 2005
0
2
4
6
8
10
12
14
Iceland
Denmark
Sweden
New Zealand
France
Germany
Italy
Canada
Japan
United States
Source: Organization for Economic Cooperation and Development
17-17
Government Failure
Examples of pork barrel politics
Chicago wilderness program
Bison meat, cauliflower, and
pumpkin supports
Catfish as livestock spending
9,300 special projects in 2003
Waste and fraud in Katrina relief
spending
17-18
Key Terms
public choice theory
logrolling
paradox of voting
median-voter model
government failure
special-interest
effect
earmarks
rent seeking
benefits-received
principle
ability-to-pay
principle
progressive tax
regressive tax
proportional tax
tax incidence
efficiency loss of a
tax
17-19
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Antitrust Policy and
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17-20