Lnc6 - Lecture notes Companion 6 Adam Smith on Taxation...

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Lecture notes Companion 6 Adam Smith on Taxation ( Wealth of Nations, 1776) 1. Taxes should be levied “fairly” (whatever that means). Remember that there are two principles of taxation that apply here, the ability-to-pay principle (people with higher incomes/wealth should pay more) and the benefits received principle (people who receive more services from the government should pay more) . These are two different views of what is “fair.” 2. Taxes should be neutral in their effects on economic activity, i.e., they should be “neutral,” or “efficient,” and not distort people’s economic decisions and behavior. Two purely neutral taxes: 1. A land tax, since no amount of tax will lead the landlord to stop using the land, and 2. A poll tax, or head tax, which taxes each person exactly the same as every other person, such as a tax which required every American to pay $1000 in tax, regardless of income, spending, etc. This tax would not distort economic behavior (well, not much) since the only ways to avoid the tax would be to leave the country or die. Taxes of this type, however, usually violate the fairness principle. Margaret Thatcher’s introduction of such a tax in Britain some years ago was so unpopular that it cost her the prime minister’s job. Putting the first two principles together, it is clear that it is impossible to have a tax that is both perfectly fair and perfectly neutral. However, some taxes are fairer than others and some are more neutral than others, and this should be considered when making tax policy. (Hey—why does it matter if people’s decisions and behavior are “distorted”?
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This note was uploaded on 11/23/2011 for the course ECON 231 taught by Professor Staff during the Fall '09 term at Calhoun Community College.

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Lnc6 - Lecture notes Companion 6 Adam Smith on Taxation...

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