1. Taxation: Criteria for Evaluating Revenue Options
Troy University
PA6650- Governmental Budgeting
Chapter 7

2. Taxation
Governments exercise their sovereign power to collect coercive payments…taxes…rather than by selling products or services
Type and amount are determined through political processes

3. Overview 75% of income from taxes levied on:
Purchases or sales
Property ownership or transfer
25% from miscellaneous revenue
Lotteries
Interest on invested funds
Intergovernmental revenue

4. Overview of Taxation Systems
Separation of revenue sources by level of government
Federal level relies mostly on individual income tax (65% of revenue) and corporate income taxes (10%) and there is no federal General Sales Tax. Some federal excise taxes(motor fuels), customs duties, etc. No federal property tax.
States use individual income taxes (41 states) and corporate income taxes (44 states) and sales taxes on goods and services (45 states)
Localities use property taxes and some income taxes

5. Comparison to Other Countries
Page 297 of text
Notice the Scandinavian Countries
Mexico, Korea

6. So You Think You’re Being Taxed?
TAX FREEDOM DAY for 2007 is April 30

7. So You Think You’re Being Taxed?

8. So You Think You’re Being Taxed?

9. Exercise
Create a list of the taxes we pay

10. Standards For Tax Policy
The primary goal of taxation is to transfer control of resources from one group in the society to another and to do so in ways that do not jeopardize, and may even facilitate, the attainment of other economic goals
Taxation shifts purchasing power among groups
Taxation shifts control of purchasing power from private sector to public sector

11. Adam Smith’s Tax Maxims
Everyone should contribute proportionally
Clearly defined amount, not arbitrary
Timing and method should be convenient
Minimum impact

12. Equity Standard equity methods Other equity approaches (Wildavsky)
Benefits Received (user fees, motor fuels)
Ability to pay (income, property taxes)
Other equity approaches (Wildavsky)
Get what you pay for?
Equal access?
Equal results?

13. Equity HORIZONTAL EQUITY VERTICAL EQUITY
Equal treatment of taxpayers with equal ability to pay
VERTICAL EQUITY
Relative tax burden on taxpayers with different ability to pay
REGRESSIVE – lower rates in high ability groups
PROGRESSIVE – higher rates in high ability groups
PROPORTIONAL = same rates in all groups

14. Who Really Pays? IMPACT, SHIFTING, and INCIDENCE (p.305)
How businesses respond to taxation
Forward shifting – higher prices to customers for product
Absorption – lower return to owners of the business
Backward shifting – lower payment to suppliers of resources to the business

15. Adequacy of Revenue Production
Taxes should be socially acceptable
Some taxation is punitive (cigarettes, alcohol)
TAX REVENUE EQUATION
Tax Yield = R
Tax rate = t
Tax Base = B
R = t x B
LAFFER CURVE – rate-revenue curve

16. Adequacy of Revenue Production
Short-run (cyclical) and Long-run (secular) issues
CYCLICAL ADEQUACY (provides good revenue stability during boom-bust cycles)
Income Elasticity – a 1% increase in income yields > 1% spending is elastic
Motor fuel and tobacco demand are inelastic

17. Collectability
Must keep collection costs low
Complexity costs more

18. Economic Effects Work v. leisure (work less due to taxes)
Business operations (relocating or curtailing ops)
Shopping, purchases, location (out-of-state purchasing)
Personal management (behavior due to tax breaks, like baby’s birth date or SUVs)
Productive investment (unproductive tax shelters)
Savings (less money saved)

19. State and Local Taxes and Economic Development
Competitive rates with neighbors
Tax breaks

20. Transparency
Adoption – laws should be adopted in an open, legislative process
Administration – objective and explicit criteria
Compliance requirements – understandable tax computation
Amount of payment – clearly defined and known

21. Taxes and Externalities
Regulations, pollution rights, subsidies, taxes
Two types of tax instruments
Emission Taxes ($20/lb of sulphur dioxide)
Indirect taxes ($1/ton of coal burned)

22. Conclusion
Taxes on income, taxes on ownership and ownership exchange, and taxes on purchase or sales
Taxes are involuntary
Taxes can be evaluated on several criteria
Equity (horizontal and vertical)
Adequacy (stability)
Collectability
Transparency
Economic effects