07ECO100OutlineTaxes

# General results two contributions from observo master

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General Results Two Contributions from Observo, Master of the Bleeding Obvious Observation 1 If the tax rate on income is 0%, then income taxes paid =\$0 Observation 2 If the tax rate on income is 100%, then income taxes paid =\$0 Implication The tax rate that maximizes government revenues is greater than 0% and less than 100% 1 This is not to say the rate is chosen to maximize GS 2 Let us assume hill-shaped relationship between tax rates and receipts . . . Gazzale (University of Toronto) ECO100: Government Interventions II 13 / 19

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Analyzing the Excise Tax General Results Will decreasing tax rates increase tax revenues? The Laffer Curve: Two Possibilities for a random rate T % (e) T →↑ GS (f) T →↓ GS Gazzale (University of Toronto) ECO100: Government Interventions II 14 / 19
Assessing a Tax System Assessing a Tax System Efficiency How much surplus in lost? N.B. No DWL from a lump-sum tax Equity How fair is it? 1 Benefits principle 2 Ability-to-pay principle Regressive tax (e.g., sales tax) Progressive tax (e.g., Canada’s income tax) Gazzale (University of Toronto) ECO100: Government Interventions II 15 / 19

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Assessing a Tax System Equity vs. Efficiency Canada’s 2012 Federal Income Tax A Progressive Tax Schedule Income Marginal From To Tax Rate \$0 \$42,707 15% \$42,707 \$85,414 22% \$85,414 \$132,406 26% \$132,406 29% Table: Source: Canada Revenue Agency Example: \$100,000 in earnings Gazzale (University of Toronto) ECO100: Government Interventions II 16 / 19
Assessing a Tax System Equity vs. Efficiency Application: Canada’s Pension Plan Quebec is, of course, different The Tax Worker Contribution 4.95% of earnings between \$3,500 and \$50,100 Firm matches worker’s contribution Assume demand for labor more elastic than supply, who has higher incidence?

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