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31 - 1Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Public Choice Theoryand
The Economics of Taxation
31C H A P T E R
31 - 2Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
PUBLIC CHOICE THEORYGovernment Failures
Public Choice
Collective Decisions
Revealing Preferences Through Majority Voting
Inefficient Voting Outcomes
31 - 3Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Majority Voting:
Fails to take into account the strengthof the preferences of individual voters -and may yield economically inefficientoutcomes...
PUBLIC CHOICE THEORY
31 - 4Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Majority Voting:Inefficient Voting Outcomes
COMPARE $300 TAX TO PERSONALBENEFIT OF A PUBLIC GOOD
Adams - BENEFIT $700 - "YES"
Benson - BENEFIT $250 - "NO"
Conrad - BENEFIT $200 - "NO"
PUBLIC CHOICE THEORY
The “No” Votes Win but,
the decision is inefficient…
31 - 5Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Ben
efit
; T
ax $700
$250
$200
$300
(YES)(YES) (NO)(NO) (NO)(NO)
An Inefficient “NO” Vote
Adams Benson Conrad
The NO vote wins butis inefficient since...
PUBLIC CHOICE THEORY
31 - 6Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Ben
efit
; T
ax $700
$250
$200
$300
(YES)(YES) (NO)(NO) (NO)(NO)
An Inefficient “NO” Vote
Adams Benson Conrad
The NO vote wins butis inefficient since...
MSB $1,150 > MSC $900
PUBLIC CHOICE THEORY
31 - 7Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Ben
efit
; T
ax $700
$250
$200
$300
(YES)(YES) (NO)(NO) (NO)(NO)
An Inefficient “NO” Vote
Adams Benson Conrad
The NO vote wins butis inefficient since...
MSB $1,150 > MSC $900
PUBLIC CHOICE THEORY
How about an
inefficient
“YES” vote?
31 - 8Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Ben
efit
; T
ax
$100
$350 $350
$300
(NO)(NO) (YES)(YES) (YES)(YES)
An Inefficient “YES” Vote
Adams Benson Conrad
The Yes vote wins butis inefficient since....
PUBLIC CHOICE THEORY
31 - 9Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Ben
efit
; T
ax
$100
$350 $350
$300
(NO)(NO) (YES)(YES) (YES)(YES)
An Inefficient “YES” Vote
Adams Benson Conrad
The Yes vote wins butis inefficient since....
PUBLIC CHOICE THEORY
MSB $800 < MSC $900
31 - 10Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
PUBLIC CHOICE THEORY
Interest Groups
Political Logrolling
Paradox of Voting
Median-Voter Model
31 - 11Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Special Interest Effect
Rent-Seeking Behavior
Clear Benefits, Hidden Costs
Limited and Bundled Choice
Bureaucracy and Inefficiency
Imperfect Institutions
GOVERNMENT FAILURE
31 - 12Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
APPORTIONING THE
TAX BURDENBenefits-Received Principle
Ability-to-Pay Principle
• Progressive Tax
• Regressive Tax
• Proportional Tax
31 - 13Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
TAX APPLICATIONS:
• Personal Income TaxProgressive
• Sales TaxRegressive
• Corporate Income TaxProportional - Regressive
• Payroll TaxesRegressive
• Property TaxesRegressive
Identify whether progressive, regressive, or proportional
31 - 14Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
TAX INCIDENCE ANDEFFICIENCY LOSS
Division of BurdenElasticities: With a specific supply -
Greater elasticity = greater shift to consumers
With a specific demand -The more inelastic the supply -
the greater the portion borne by producers
31 - 15Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Tax RevenuesEfficiency Loss of a TaxRole of ElasticitiesQualifications
•Redistributive Goals•Reducing Negative Externalities
TAX INCIDENCE ANDEFFICIENCY LOSS
31 - 16Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Personal Income TaxIndividual
Corporate Income TaxStockholders – Consumers
Sales and Excise TaxesConsumers
Property TaxesOwner or Renter
PROBABLE INCIDENCE OF U.S. TAXESTHE U.S. TAX STRUCTURE
31 - 17Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
United KingdomNetherlands
FranceGermany
ItalyCanadaSweden
United StatesJapan
0 5 10 15 20 25 30 35
1997 DATA
GLOBAL PERSPECTIVETaxes on Goods and Services as a Percentage of Total Tax Revenues, Selected Nations
Source: Organization for Economic Cooperation and Development
31 - 18Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
THE ISSUE OF FREEDOM
The Conservative Position
Chapter Conclusions
The Liberal Position
Fallacy of Limited Decisions
public choice theorylogrollingparadox of votingmedian-voter modelgovernment failurespecial-interest effectrent seekingbenefits-received principle
ability-to-pay principle
progressive tax
regressive tax
proportional tax
tax incidence
efficiency loss of a tax
fallacy of limited decisions
ENDBACKCopyright McGraw-Hill/Irwin 2002
31 - 20Copyright McGraw-Hill/Irwin, 2002
Public Choice Theory
Government Failure
Apportioning the Tax Burden
Tax Applications
Tax Incidence and Efficiency Loss
The U.S. Tax Structure
The Issue of Freedom
Key Terms
PreviousSlide
NextSlide
EndShow
Next:
Chapter 32
Antitrust,Regulation,andIndustrial Policy
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