Lecture Notes 7 - Public Economics Principles and Practice...

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Public Economics Principles and Practice Part Seven Public Finance and Taxation Peter Abelson Applied Economics and University of Sydney
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Public Finance and Taxation Introduction to Public Finance Incidence of Taxation Taxation and Efficiency Optimal Taxation and Tax Reform Government Borrowing and Debt
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Chapter 20 Introduction to Public Finance Sources of Public Finance Basic Elements of a Tax System Tax Hypothecation Tax Avoidance and Evasion Evaluating Tax Systems
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Sources of Public Finance:
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Three Elements of a Tax System Tax bases: the economic activity or item on which tax is levied. Tax rates: the rate at which tax is levied on the tax base. Tax units: the entity on which tax is levied.
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Tax bases Head tax (poll tax) – a lump sum tax Income ( Y ) Expenditure (consumption) Wealth (value of assets owned less debt) • Note Y = Y L + Y k = C + S A tax on income is a tax on labour ( L ) and capital ( K ) or on consumption (C) + savings (S). A tax on consumption ( C ) excludes savings ( S ).
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Tax bases (cont.) Direct and indirect taxes. General and partial taxes. Various consumption taxes Expenditure tax VAT or GST Partial commodity taxes (excise taxes not necessarily borne by consumers).
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Tax bases in OECD countries
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Tax rates Tax rate = tax collected / tax base Average tax rate = total tax paid / value of tax base Marginal tax rate = tax paid / value of tax base Tax rate structure is a complete set of tax rates Proportional tax system: ATR is constant over tax base Progressive tax system: ATR rises as tax base rises Regressive tax system: ATR falls as tax base rises
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Tax units Key choice: individuals or households. Choice does not matter if MTR is constant. Australia and most OECD countries treat individuals as the tax unit and households as welfare unit. This is inconsistent. Also there are grey areas. Choice of tax unit can significantly affect tax liability and have efficiency and equity implications.
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Tax exemptions There are numerous tax concessions. Some are complete exemptions; others are partial exemptions. Examples Superannuation income. Owner-occupied housing. Bequests and inheritance. Goods exempt from GST. Not-for-profit organisations are exempt from income tax.
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Tax Hypothecation Most public finance treats expenditure decisions and revenue collection as separate decisions. Tax hypothecation links expenditure to source of funds. Hypothecation is quite common (social security taxation, fuel levies for roads, levies for fire fighting services, sugar and milk levies).
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Tax hypothecation (cont.) Advantages Popular: may be easier to raise revenue. Facilitates tests of public benefit.
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This note was uploaded on 08/24/2010 for the course ECOS 3011 taught by Professor Peterabelson during the Three '10 term at University of Sydney.

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Lecture Notes 7 - Public Economics Principles and Practice...

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