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Chapter 12

Chapter 12 - Chapter 12 Taxes and Efficiency One tax system...

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Chapter 12 Taxes and Efficiency - One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to tax payers - The costs to taxpayers include; o The tax payment itself o Deadweight losses o Administrative burden Income vs. consumption tax - The income tax reduce the incentive to save o If income tax rate = %25 , 8 % interest rate = 6% after tax interest rate o The lost income compounds over time - Some economists advocate taxing consumptions instead of income o Would restore incentive to save o Better for individuals’ retirement - Consumption tax- like provisions in the U.S. tax code include Individual Retirement Accounts, 401(k) plans o People can put a limited amount of saving into such accounts o The funds are not taxed until withdrawn at retirement (Roth IRA are different- pay tax on money today but no tax on money when you take it out) - Europe’s Value- Added Tx (VAT) is like a consumption tax. Administrative Burden - Includes the time and money people spend to comply with tax laws - Encourages the expenditure of resources on legal tax avoidance (see Times store on GE lobbying for loopholes that allow it to reduce taxes; also, se GE website to explain o Hiring accountants to exploit “loopholes” to reduce one’s tax burden - Type of deadweight loss
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- Could be reduced if the tax code were simplified but would require removing loopholes (tax expenditures) politically difficult Marginal vs. Averadge Tax Rates - Average tx rate o Total taxes paid divided by total income o Measures the sacrifice a taxpayer makes - Marginal tax rate o The extra taxes paid on an additional dollar of income o Measures the incentive effects of tax on work effort, saving,etc. Lump Sum Taxes - A lump- sum tax is the same for every person - Ex. Lump- sum tax = $4000/person Perceived as unfair Taxes and Equity - Another foal of tax policy: equity – distributing the burden of taxes “fairly” - Agreeing on what is “fair” is much harder than agreeing on what is “efficient” Benefits Principle
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Chapter 12 - Chapter 12 Taxes and Efficiency One tax system...

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