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BU224_Krugman_Chapter 21

BU224_Krugman_Chapter 21 - Krugman_Econ_CH21_493-518 2:44...

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chapter 493 21 >> N M ARCH 31, 1990, HUNDREDS OF thousands of British citizens marched across London, protest- ing a new tax that had been introduced by Prime Minister Margaret Thatcher. As some protesters clashed with police, the initially peaceful demonstration turned into a riot, with hundreds injured. The violence came as a surprise, but maybe it shouldn’t have: the tax had aroused angry opposition throughout Britain. Later that year, Mrs. Thatcher was forced to resign, and many observers believed that the tax controversy was the prime cause of her fall. The tax at issue was officially known as the “Community Charge” but was popularly known as the “poll tax.” Until 1989 local public services like street cleaning and trash collection had been financed with “the rates,” a tax that depended on the value of people’s homes. (Most local services in the United States are financed with similar Taxes, Social Insurance, and Income Distribution A TAX RIOT O What you will learn in this chapter: Why designing a tax system involves a trade-off between equity and efficiency Two concepts of fairness in taxa- tion: the benefits principle and the ability-to-pay principle The different kinds of taxes and their effects on people’s eco- nomic behavior at different lev- els of income The major types of government spending and how they are justi- fied What income inequality is and why there is a policy debate about it Margaret Thatcher and these protesters differed sharply over the fairness of the poll tax. AP/Wide World Photos HIP-Archive/Topham/The Image Works property-based taxes.) Mrs. Thatcher, howev- er, replaced these property taxes with a pay- ment from each individual over the age of 18. Although the amount of the poll tax var- ied from town to town, every adult in a given town owed the same amount, regardless of income or the value of his or her property. Supporters of the poll tax argued that it was more efficient than the tax it replaced. Because the old tax depended on the value of property, it discouraged people both from buying more expensive homes and from improving the homes they had. Supporters also argued that the poll tax was fair, because the cost of providing local public services depended mainly on how many people lived in a town, not on how rich those people were. But opponents argued that the poll tax was extremely unfair because it did not take into account differences in people’s ability to pay— a single mother who worked as a waitress and
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Principles of Tax Policy Tax policy always has two goals. On the one hand, governments strive to achieve tax efficiency: they try to minimize the direct and indirect costs to the economy of tax collection. On the other hand, governments also seek tax fairness, or tax equity: they try to ensure that the “right” people actually bear the burden of taxes. The cen- tral dilemma in tax policy—the dilemma that led to London’s poll tax riot—is that an efficient tax may not seem fair, and a seemingly fair tax may not be efficient. So there
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