copyright 2008 the mcgraw-hill companies 29-1 public choice theory government failure apportioning...
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Copyright 2008 The McGraw-Hill Companies29-1
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
29Public Choice Theory and the Economics of Taxation
Copyright 2008 The McGraw-Hill Companies29-2
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Chapter Objectives• The Difficulties of Conveying
Economic Preferences Through Majority Voting
• “Government Failure” and Why It Occurs
• Different Tax Philosophies and Ways to Distribute a Nation’s Tax Burden
• Principles Related to Tax Shifting, Tax Incidence, and Efficiency Losses From Taxes
Copyright 2008 The McGraw-Hill Companies29-3
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Public Choice Theory• Government Failures
• Revealing Preferences Through Majority Voting–Inefficient Voting
Outcomes• Inefficient “No” Vote
• Inefficient “Yes” Vote
Graphically…
O 29.1
Copyright 2008 The McGraw-Hill Companies29-4
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Public Choice TheoryInefficient Voting Outcomes
InefficientMajority “No” Vote
InefficientMajority “Yes” Vote
$300 $300
Ben
efi
t; T
ax
Ben
efi
t; T
ax
0 0
$700
$250$200
$100
$350 $350
Adams
Adams
Benson
BensonConrad
Conrad
“NO” “NO” “YES” “YES”“YES” “NO”
MSB > MSC$1,150 > $900
Inefficient Since“NO” Wins!
MSB < MSC$800 < $900
Inefficient Since“YES” Wins!
Copyright 2008 The McGraw-Hill Companies29-5
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Public Choice Theory• Interest Groups
• Political Logrolling–Logrolling – Vote Trading
• Paradox of Voting–Preferences
–Voting Outcomes
• Median-Voter Model
O 29.2
Copyright 2008 The McGraw-Hill Companies29-6
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Government Failure• Special-Interest Effect
–Pork-Barrel Politics• Rent-Seeking Behavior• Clear Benefits, Hidden
Costs• Limited and Bundled
Choice• Bureaucracy and
Inefficiency• Imperfect Institutions
Copyright 2008 The McGraw-Hill Companies29-7
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
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Apportioning the Tax Burden
• Benefits-Received Principle
• Ability-to-Pay Principle• Tax Progressivity
–Progressive–Regressive–Proportional
• Applications
Copyright 2008 The McGraw-Hill Companies29-8
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Tax Incidence• Elasticity and Tax
Incidence–Division of Burden–Elasticities
• Efficiency Loss of a Tax–Tax Revenues–Efficiency Loss–Role of Elasticities
G 29.1
Copyright 2008 The McGraw-Hill Companies29-9
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Tax IncidenceIncidence of an Excise Tax
0
2
4
6
8
10
12
14
5 10 15 20 25 Q
P
Pri
ce (
Per
Bo
ttle
)
Quantity(Millions of Bottles Per Month)
S
D
S’
Tax $2
Copyright 2008 The McGraw-Hill Companies29-10
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Tax Incidence• Elasticity and Tax
Incidence–Division of Burden–Elasticities
• Efficiency Loss of a Tax–Tax Revenues–Efficiency Loss–Role of Elasticies
Copyright 2008 The McGraw-Hill Companies29-11
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Tax Incidence
0
P
P
0
Tax Incidence andElastic Demand
Tax Incidence andInelastic Demand
Demand Elasticity and the Incidenceof an Excise Tax
De
Dt
Tax TaxSt
S
St
S
Q2
P1
Pe
Pa
P1
Pi
Pb
Q1 Q2Q1
aa
b
b
cc
Copyright 2008 The McGraw-Hill Companies29-12
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Tax Incidence
0
P
P
0
Tax Incidence andElastic Supply
Tax Incidence andInelastic Supply
Supply Elasticity and the Incidenceof an Excise Tax
D D
S
SSt
St
P1
Pa
Pe
P1
Pb
Pi
Q1Q2 Q1Q2
Tax Tax
aa
bb
c
c
Copyright 2008 The McGraw-Hill Companies29-13
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Tax IncidenceEfficiency Loss of a Tax
0
2
4
6
8
10
12
14
5 10 15 20 25 Q
P
Pri
ce (
Per
Bo
ttle
)
Quantity(Millions of Bottles Per Month)
S
D
S’
Tax $2
Tax Paid byConsumers
Tax Paid byProducers
EfficiencyLoss (or
DeadweightLoss)
Copyright 2008 The McGraw-Hill Companies29-14
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Incidence of U.S. Taxes• Personal Income Tax
• Corporate Income Tax
• Sales and Excise Taxes
• Property Taxes
• The U.S. Tax Structure
Copyright 2008 The McGraw-Hill Companies29-15
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Incidence of U.S. TaxesTaxes on Goods and Services as a Percentage of Total Tax Revenues
GLOBAL PERSPECTIVE
United KingdomNetherlands
GermanyItaly
SwedenCanadaFranceJapan
United States
0 5 10 15 20 25 30 35
32.7
30.8
29.2
26.9
26.4
26.3
25.4
20.1
17.6
Source: Organization for Economic Cooperation and Development, 2002
Copyright 2008 The McGraw-Hill Companies29-16
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
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Government Failure
• E.P.A. House Building• Chicago “Wilderness”
Program• Bison Meat, Cauliflower, and
Pumpkin Supports• Catfish as Livestock
Spending• 9,300 Special Projects in 2003• Waste and Fraud in Katrina
Relief Spending
Last
Word
“…In the News”
Copyright 2008 The McGraw-Hill Companies29-17
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
Key Terms• public choice the
ory• logrolling• paradox of votin
g• median-voter mo
del• government failu
re• special-interest e
ffect• rent-seeking
• benefits-received principle
• ability-to-pay principle
• progressive tax• regressive tax• proportional tax• tax incidence• efficiency loss of
a tax
Copyright 2008 The McGraw-Hill Companies29-18
Public Choice TheoryGovernment FailureApportioning the Tax BurdenTax IncidenceIncidence of U.S. TaxesLast Word
Key Terms
End Show
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Antitrust Policy andRegulation