Presentation on theme: "Introduction to Government Finance"— Presentation transcript:
1 Introduction to Government Finance Chapter 10Introduction to Government Finance
2 Federal, State, and Local Revenue Learning ObjectivesAlternative means of financing government expendituresAnalysis of tax impacts on the economy and its criteria for evaluationAlternative taxation methods
3 Alternative Means of Financing Government Expenditure Alternatives are influenced by the following factors:Political Equilibrium (e.g. voting)Market Equilibrium and Its Efficiency (e.g. subsidies & taxation)The Distribution of Income (e.g. equity)
4 Alternative Means of Financing Government Expenditure Sources:Taxes:PayrollIncome (Corporate and Personal)PropertySales and ExciseEstateTariffsFeesTuitionLicenses$3 trillion annually!!
5 Alternative Means of Financing Government Expenditure What are taxes? Taxes are compulsory payments to governmentTax BaseTax Rate StructureMarginal vs. AverageProgressive, Proportional & Regressive
6 Tax Basics Tax Base The item or activity that is to be taxed General – no exclusions or exceptionsSelective – allows exceptions or deductionsExcise - selective tax on targeted goodsWhat are some examples?
7 Tax Basics Tax Rate Structure The relationship between the amount that is to be paid in tax and the tax base for a given accounting periodMarginal Tax Rate - The amount by which the tax increases when the tax base increases
8 Tax Basics Tax Rate Structure The relationship between the amount that is to be paid in tax and the tax base for a given accounting periodAverage Tax Rate - The total amount of tax divided by the total amount of the tax base
9 Tax Basics Tax Rate Structure The relationship between the amount that is to be paid in tax and the tax base for a given accounting periodTax bracket - The range of the tax base in which the marginal rate is constantCurrent Tax Code
10 Tax Basics Tax Rate Structure Progressive Tax is where the marginal tax rate is increasing and greater than the average tax rate.Proportional Tax is where the marginal tax rate is constant and equal to the average tax rate. (Sometimes called a Flat Tax)Regressive Tax is where the marginal tax rate is decreasing and less than the average tax rate.
11 Figure 10.1 A Proportional Tax Rate Structure ATR = MTRtTax Rate (Percent)Flat TaxTax Base (Dollars per Year)
12 Figure 10.2 A Progressive Tax Rate Structure MTR35ATR25Tax Rate (Percent)Income Tax(Current Structure)154,00029,00070,000Tax Base (Dollars of Taxable Income per Year)
13 Figure 10.3 An Example of a Regressive Tax Structure 15.30Social Security Payroll Tax12.35Tax Rate (Percent)ATR2.9MTR$76,200$100,000Annual Labor Earnings perWorker
15 How Should the Burden of Government Be Financed? Benefit PrincipleThose who benefit the most from a particular program should pay the most for that program (Lindahl Tax principle at work).Ability-to-Pay PrincipleThose who have the greatest ability to pay should be required to pay the most.Equity vs. Efficiency
16 Criteria for Evaluating Methods of Government Finance EquityThe distribution of the government finance burden should coincide with commonly held notions of fairness and ability-to-pay. EfficiencyThe system of government finance should raise revenues with the least loss in efficiency in the private sector. Administrative Ease (Efficiency)A government finance system should be relatively easy to administer consistently, without excessive costs to collect, enforce, and comply with taxes and tax laws.
17 Tax Compliance, Avoidance and Evasion Tax Evasion is the term for illegal ways to avoid paying taxes. It is typically the result of not declaring income or overstating otherwise legal deductions. Tax Avoidance is the term for legal ways to avoid paying taxes, typically the result of avoiding activities that are taxed, delaying the time at which taxes are owed, or taking an action designed to lower a tax burden.
18 Figure 10.4 Reducing Tax Evasion MCMB = MTRCost and BenefitUnreported Income per Year (Dollars)ECost and BenefitUnreported Income per Year (Dollars)D*1BMCEMB1 = MTR12MB2E2D*CMC1Cost and BenefitUnreported Income per Year (Dollars)MB = MTRE1D*12MC2ED*Reduce tax evasion by increasing its MC or reduce its MB!
19 Alternatives to Taxation Debt Finance is the means of financing expenditures by issuing bonds.IntergenerationalInflationary Finance is the means of financing expenditures through the printing of money.Winners vs.Losers
20 More Alternatives to Taxation User ChargesUsers of a government service can expect to pay for that service. Examples include tuition, fees paid to enter state parks, greens fees at publicly owned golf courses.Earmarked TaxesTaxes can be implemented to fund specific public goods. Examples include gasoline taxes and tolls designed to fund road and bridge repair.
21 Figure 10.6 User Charges and Efficiency Trash Pickups per YearMSB = MPB + MEBMPBMSCC*C* + S*Z*Q*S*ZS* = Subsidy Via Taxes
22 User Charges and the Transportation Infrastructure (Group Discussion) Why voters always demand better roads and airports (even though their tax will go up)….MPB > MPC ?
23 Figure 10.7 User Charges for a Congestible Government-Supplied Service User Charges (Cents per Mile)Vehicles per Mile per HourMSC100N*What if the toll is $0? Given D1 shifts to D220D2 = MSB2120E*E1D1 = MSB180E2150
24 Why Not State Lotteries 38 states run or participate in lotteries.State Lotteries account for more than 3% of state revenues.People of varying incomes spend approximately the same amount on lotteries, which suggests that the lottery system is a regressive means of creating government revenue.Lotteries pay out a smaller portion of revenue to winners than other forms of gaming (horse racing, casinos, etc.).