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Economic Impact of Taxes (cont.). Taxes and other governmental revenues influence the economy by affecting. Resource allocation Behavior adjustment. Sin tax Know examples of sin taxes. Section 1. Economic Impact of Taxes (cont.). Productivity and growth. Determining incidence of a tax - PowerPoint PPT Presentation
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Section 1
Economic Impact of Taxes (cont.)
• Taxes and other governmental revenues influence the economy by affecting
– Resource allocation
– Behavior adjustment
• Sin tax
•Know examples of sin taxes
Section 1
Economic Impact of Taxes (cont.)
– Productivity and growth
– Determining incidence of a tax
–Understand how “incidence of a tax” works and how the burden of the tax can be shifted to the consumer depending on the nature (elasticity) of the product.
Shifting the Incidence of a Tax
Section 1
Criteria for Effective Taxes (cont.)
• Taxes must meet 3 criteria:
– Equity—impartial and just: Makes sense to avoid tax loopholes
– Simplicity—tax laws written so taxpayers and collectors can understand them
– Efficiency—easy to administer and successful in generating revenue
Section 1
• United States taxes are based on two principles
– Benefit principle of taxation
Two Principles of Taxation (cont.)
• Limitations to the benefit principle of taxation
• Those who receive government services are least likely to afford them.
• Benefits are hard to measure and impact others.
Section 1
– Ability-to-pay principle of taxation
• We can’t always measure benefits derived from government spending.
• Assumes individuals taxed more suffer less discomfort paying taxes
Two Principles of Taxation (cont.)
Section 1
• Three general types of taxes exist in the United States today.
– Proportional tax
Three Types of Taxes (cont.)
• If the percentage tax rate is constant, the average tax rate is constant.
• Medicare tax fund
Three Types of Taxes
Section 1
– Progressive tax
• Marginal tax rate
Three Types of Taxes (cont.)
– Regressive tax
Profiles in Economics:Monica Garcia Pleiman
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