hubbard01_instructorppt18.ppt

The Tax System and theDistribution of Income,2 of 28,CHAPTER,18,Public Choice,Taxes,and the Distribution of Income,Fernando Quijano,Prepared by:,When Barack Obama became presidentin January 2009,he proposed a number ofchanges to the tax system.,3 of 28,After studying this chapter,you should be able to:Understand the tax system in the United States,including the principles of taxation that governments use to create tax policy.Understand the effect of price elasticity on tax incidence.Discuss the distribution of income in the United States,and understand the extent of income mobility.,Should the Government Use the Tax System to Reduce Inequality?,LEARNING OBJECTIVES,Tax laws affect economic incentives and economic activity,and can also affect fairness.,4 of 28,Public choice model A model that applies economic analysis to government decision making.,Public Choice,Taxes,andthe Distribution of Income,5 of 28,Public Choice,How Do We Know the Public Interest?Models of Voting,The Voting Paradox,Table 18-1,The Voting Paradox,Define the public choice model and explain how it is used to analyze government decision making.,18.1 LEARNING OBJECTIVE,6 of 28,Voting paradox The failure of majority voting to always result in consistent choices.,Arrow impossibility theorem A mathematical theorem that holds that no system of voting can be devised that will consistently represent the underlying preferences of voters.,The Voting Paradox,Public Choice,How Do We Know the Public Interest?Models of Voting,Define the public choice model and explain how it is used to analyze government decision making.,18.1 LEARNING OBJECTIVE,7 of 28,Median voter theorem The proposition that the outcome of a majority vote is likely to represent the preferences of the voter who is in the political middle.,Public Choice,How Do We Know the Public Interest?Models of Voting,The Median Voter Theorem,Define the public choice model and explain how it is used to analyze government decision making.,18.1 LEARNING OBJECTIVE,8 of 28,FIGURE 18-1,The Median Voter Theorem,The Median Voter Theorem,Public Choice,How Do We Know the Public Interest?Models of Voting,The median voter theorem states that the outcome of a majority vote is likely to represent the preferences of the voter who is in the political middle.In this case,David is in the political middle because two voters want to spend more on breast cancer research than he does and two voters want to spend less.In any vote between a proposal to spend$2 billion and a proposal to spend a different amount,a proposal to spend$2 billion will win.,Define the public choice model and explain how it is used to analyze government decision making.,18.1 LEARNING OBJECTIVE,9 of 28,Rent seeking Attempts by individuals and firms to use government action to make themselves better off at the expense of others.,Logrolling refers to the situation where a member of Congress votes to approve a bill in exchange for favorable votes from other members on other bills.Because becoming informed on an issue may require time and effort and the economic payoff is often low,some economists argue that many voters are rationally ignorant of the effect of rent-seeking legislation.,Government Failure?,Rent seeking,Logrolling and Rational Ignorance,Public Choice,Define the public choice model and explain how it is used to analyze government decision making.,18.1 LEARNING OBJECTIVE,10 of 28,One way in which the government intervenes in the economy is by establishing a regulatory agency or commission that is given authority over a particular industry or type of product.However,because the firms being regulated are significantly affected by the regulatory agencys actions,the firms have an incentive to try to influence those actions.In extreme cases,this influence may lead the agency to make decisions that are in the best interests of the firms being regulated,even if these actions are not in the public interest.,Regulatory Capture,Government Failure?,Public Choice,Define the public choice model and explain how it is used to analyze government decision making.,18.1 LEARNING OBJECTIVE,11 of 28,Although government regulation can clearly provide important benefits to consumers,we need to take into account the costs of regulations.Economics can help policymakers devise regulations that provide benefits to consumers that exceed their costs.,Is Government Regulation Necessary?,Public Choice,Define the public choice model and explain how it is used to analyze government decision making.,18.1 LEARNING OBJECTIVE,12 of 28,The Tax System,The most widely used taxes are these:Individual income taxes.Social insurance taxes.Sales taxes.Property taxes.Excise taxes.,13 of 28,The Tax System,An Overview of the U.S.Tax System,14 of 28,FIGURE 18-2,Federal,State,and Local Sources of Revenue,2008,An Overview of the U.S.Tax System,The Tax System,Understand the tax system in the United States,including the principles that governments use to create tax policy.,18.2 LEARNING OBJECTIVE,Individual income taxes are the most important source of revenue for the federal government,and social insurance taxes are the second most important source.State and local governments receive the most revenue from sales taxes.State and local governments also receive large transfers from the federal government,in part to help pay for federally mandated programs.Many local governments depend on property taxes to raise most of their tax revenue.,15 of 28,The Tax System,Progressive and Regressive TaxesRegressive tax A tax where people with lower incomes pay a higher percentage of their income in tax than do people with higher incomes.Progressive tax A tax where people with lower incomes pay a lower percentage of their income in tax than do people with higher incomes.,16 of 28,The Tax System,Progressive and Regressive Taxes,18 1,17 of 28,Table 18-2,Federal Income Tax Brackets and Tax Rates for Single Taxpayers,2009,Table 18-3,Federal Income Tax Paid on Taxable Income of$100,000,Progressive and Regressive Taxes,The Tax System,Understand the tax system in the United States,including the principles that governments use to create tax policy.,18.2 LEARNING OBJECTIVE,18 of 28,Which Groups Pay the Most In Federal Taxes?,18-1,Federal taxesas a whole are progressive.,19 of 28,Which Groups Pay the Most in Federal Taxes?,MakingtheConnection,YOUR TURN:Test your understanding by doing related problem 2.9 at the end of this chapter.,Understand the tax system in the United States,including the principles that governments use to create tax policy.,18.2 LEARNING OBJECTIVE,20 of 28,The Tax System,Marginal and Average Income Tax Rates Marginal tax rate The fraction of each additional dollar of income that must be paid in taxes.Average tax rate Total tax paid divided by total income.,The Corporate Income Tax The federal government taxes the profits earned by corporations under the corporate income tax.Economists debate the costs and benefits of a separate tax on corporate profits.,21 of 28,The Tax System,Evaluating TaxesThe goal of economic efficiencyThe ability-to-pay principleThe horizontal-equity principleThe benefits-received principleThe goal of attaining social objectives,22 of 28,The Tax System,Evaluating TaxesTHE GOAL OF ECONOMIC EFFICIENCY,18-2,23 of 28,The Tax System,Excess burden The deadweight loss from a tax.,Should the United States Shift to a Consumption Tax?,18-2,Would a consumption tax be more efficient than an income tax?,Evaluating TaxesTHE GOAL OF ECONOMIC EFFICIENCY,24 of 28,The Tax System,Other Goals or Principles for Evaluating TaxesTHE ABILITY-TO-PAY PRINCIPLETHE HORIZONTAL-EQUITY PRINCIPLETHE BENEFITS RECEIVED PRINCIPLEATTAINING SOCIAL OBJECTIVES,25 of 28,Tax incidence The actual division of the burden of a tax.,Tax Incidence Revisited:The Effect of Price Elasticity on Who Actually Bears the Burden Of a Tax,18-3,26 of 28,Do Corporations Really Bear the Burden Of the Federal Corporate Income Tax?,18-3,Who really bears the burden of the taxes paid by Dell?Most economists agree that some of the burden of the corporate income tax is passed on to consumers in the form of higher prices.,Remember not to Confuse Who Pays the Tax with Who Bears the Burden of the Tax,27 of 28,The Effect of Price Elasticity on the Excess Burden of a Tax,18-1,28 of 28,The Distribution of Income,Measuring the Distribution of Income and Poverty,29 of 28,Table 18-5,The Distribution of Household Income in the United States,2007,Income Distribution and Poverty,Measuring the Income Distribution and Poverty,Discuss the distribution of income in the United States and understand the extent of income mobility.,18.4 LEARNING OBJECTIVE,30 of 28,The Distribution of Income,Measuring the Distribution of Income and Poverty,31 of 28,How Has the Distribution of Income Changed over Time?,Table 18-6,Income Distribution and Poverty,Measuring the Income Distribution and Poverty,Discuss the distribution of income in the United States and understand the extent of income mobility.,18.4 LEARNING OBJECTIVE,32 of 28,The Distribution of Income,Measuring the Distribution of Income and Poverty THE POVERTY RATE IN THE UNITED STATESPoverty line A level of annual income equal to three times the amount necessary to purchase the minimal quantity of food required for adequate nutrition.Poverty rate The percentage of the population that is poor according to the federal governments definition.,33 of 28,The Distribution of Income,Measuring the Distribution of Income and Poverty,18 5,18-4,34 of 28,Table 18-7,Poverty Rates Vary across Groups,2007,Income Distribution and Poverty,Measuring the Income Distribution and Poverty,The Poverty Rate in the United States,Discuss the distribution of income in the United States and understand the extent of income mobility.,18.4 LEARNING OBJECTIVE,35 of 28,The Distribution of Income,Explaining Income InequalityFor most people,the most important factor of production they own is their labor.Therefore,the income they earn will depend on how productive they are and on the prices of the goods and services their labor helps to produce.Many people own other factors of production,such as capital in the form of stock on corporations.Ownership of capital is not equally distributed.The tax system does not seem to have played a major role in recent changes in income inequality.Earning an income is also subject to good and bad fortune.,36 of 28,The Distribution of Income,Showing the Income Distribution with a Lorenz CurveLorenz curve A curve showing the distribution of income by arraying incomes from lowest to highest on the horizontal axis and indicating the cumulative fraction of income earned by each fraction of households on the vertical axis.,37 of 28,The Distribution of Income,Showing the Income Distribution with a Lorenz Curve,38 of 28,The Distribution of Income,INCOME MOBILITY IN THE UNITED STATES,18-2,Are Many Individuals Stuck in Poverty?,39 of 28,The Distribution of Income,Poverty and the Distribution of Income around the World,40 of 28,Income Distribution and Poverty around the World,Income Distribution and Poverty,Discuss the distribution of income in the United States and understand the extent of income mobility.,18.4 LEARNING OBJECTIVE,41 of 28,The Distribution of Income,Poverty and the Distribution of Income around the World,18-7,42 of 28,The Distribution of Income,Poverty and the Distribution of Income around the World,43 of 28,Table 18-9,