Lecture5a.ppt

# Lecture5a.ppt - Lecture5:Efficiencyvs. Equity

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Lecture 5:  Efficiency vs.  Equity

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Reminder:  First midterm next Tuesday Exam optional, but can only help your grade Examples of past midterms are posted on WebCT My offfice hours for the next week: Thursday, 2:30 – 5:00 Monday, 1:00 – 3:30 TA’s office hours for the next week: Friday, 3:00 – 4:30 Monday, 10:30 – 12:00
Outline of lecture Choice of labor income tax schedule Other possible modifications to tax base Should capital income be taxed? (If it is, who pays the tax?) Consumption tax vs. income tax Separate taxes on particular consumption goods?

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Choice of Income Tax Schedule Nobel prize to Mirrlees and Vickrey for analysis of this question. They presumed that ideally we would like to tax individuals based on their earnings ability but that the only thing we can monitor for tax purposes is their labor income A tax on labor income then requires a trade- off between equity gains and efficiency costs from discouraging work effort
Conventional wisdom at that time Existing tax schedules when they wrote had: Tax payments always zero or positive Higher marginal tax rates for richer individuals Highest marginal tax rates in U.S. up to 87% All of these practices were called into question, suggesting instead: Transfers to poor Flat or declining marginal tax rates Top tax rates below around 50%

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Functioning of a tax schedule Example of possible tax law: No tax if Y < \$20,000, where Y is taxable income Marginal tax rate = 15% if \$20,000 < Y < \$60,000 Marginal rate = 30% if Y > \$60,000 Tax payments for those with Y > \$60,000 equal T = .15*\$40,000 + .3*( Y - \$60,000) So for someone with income Y > \$60,000, marginal tax rate is .3, while average tax rate is T/Y = .3 - \$12,000/ Y
Income Taxes, in thousands 20,000 60,000 100,000 6,000 18,000 Marginal Tax Rates

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Income Taxes, in thousands 20,000 60,000 100,000 6,000 18,000 Average Tax Rates
Income Taxes, in thousands 20,000 60,000 100,000 6,000 18,000 Average Tax Rates

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Income Taxes, in thousands 20,000 60,000 100,000 6,000 18,000 Average Tax Rates
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## This note was uploaded on 11/03/2009 for the course ACCT 130 taught by Professor Huxhold during the Spring '09 term at UCSD.

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Lecture5a.ppt - Lecture5:Efficiencyvs. Equity

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