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

Figure 1

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

Figure 2

Types of Taxes All taxes in the United States can be broken down into three categories: proportional, progressive, and regressive

VS 1