ch11 - Chapter 11 Taxation, Prices, Efficiency, and the...

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1 Chapter 11 Taxation, Prices, Efficiency, and the Distribution of Income
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2 Lump-Sum Taxes A Lump-sum tax is a fixed tax that is owed by everyone and is not subject to anything taxpayers can change. It is independent of income, consumption, or wealth. An example is a Head Tax, which is constant for everyone.
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3 Inefficiency in Taxation and the Lump- Sum Tax Inefficiency in taxation results from the ability to avoid taxes by avoiding a taxed activity. Because lump-sum taxes are unavoidable, they serve as the benchmark by which other taxes are measured in terms of efficiency.
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4 A price distorting tax alters the relative price of goods. Price Distorting Taxes
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5 Figure 11.1 A Price Distorting Tax Versus A Lump-Sum Tax A B B' Expenditure on Other Goods per Year (Dollars) Gasoline per Year (Gallons) 0 U 2 Q L E'' Y* Q T Y T U 1 Q 1 Y 1 U 3 E E' L L' T T
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6 Individual Excess Burden of a Tax The individual excess burden of a tax is the loss in well-being when a taxpayer pays taxes under a price- distorting tax instead of under a lump- sum tax.
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7 Community Charges in the U.K . The Thatcher government replaced local property taxes with a form of lump-sum tax called “the community charge.’’ The tax was set by each local council and charged a fixed amount per adult taxpayer. Despite its efficiency, the lump-sum tax was viewed as so unfair by many taxpayers that they refused to pay it.
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8 Unit Taxes A unit tax adds to the price by a fixed amount. Examples include the 32 cents per pack of cigarettes and 24 cents per gallon of gasoline in federal taxes.
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Tax Terms The Gross Price ( P G ) is the price paid by consumers. The Net Price (
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This note was uploaded on 10/28/2011 for the course ECON 332 taught by Professor D.hyman during the Spring '11 term at American University of Beirut.

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ch11 - Chapter 11 Taxation, Prices, Efficiency, and the...

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