Government Spending, Revenue, & Public Choice (14.1)

Public Goods

Demand for Public Goods Available to all consumers in an identical amount – Madison, AL sprays 2 hrs./week for mosquitoes in the summer – Each resident of Madison benefits from the 2 hrs. of spraying

Types of public goods

Optimal quantity for Public Goods How much mosquito spraying should Madison provide? – Sum of marginal benefit = marginal cost of providing the good How should the govt. pay for it? – Taxes are the most common source of govt. revenue

Tax Principles

Benefits-received taxation If you benefit from a govt. program, you should pay more in the taxes that pay for the program Madison imposes a tax on its citizens for the benefit of spraying for mosquitoes – Tax is the govt.’s value on the service

Benefits-received taxation – Problems (1) When people find out govt. value on a service, the people will understate their perceived value on that service – Why admit how much you like a service/program if you have to pay more in taxes for the service/program? – Creates a free-rider program: people benefitting from service/program w/o paying for it

Benefits-received taxation – Problems (2) People who highly value service/program may have lower incomes - What if you enjoy the spraying of mosquitoes b/c you’re outside more? -What if the reason you’re outside more is b/c you don’t have a job? -Should you have to pay more in taxes even though you don’t have a job?

Ability-to-Pay Taxation Those w/more money should pay more in taxes – Income taxes – Property taxes If you have a job, and thus can’t enjoy being outdoors more often, you would still have to pay a higher tax for spraying of mosquitoes

Other Revenue Issues

Tax Incidence Proportional tax – % of income tax same as income increases – Also known as a flat tax Progressive tax – % of income tax increases as income increases – Federal and most state income taxes are progressive Regressive tax – % of income tax decreases as income increases

Marginal Tax Rate % of each additional dollar of a taxpayer’s income that goes to taxes – High rates reduce people’s incentive to work/save/invest Millions of low-income households pay no income taxes Top 10% of tax filers pay about 2/3 of all income tax revenue

Marginal Tax Rate – Single (2010) 10% on income between $0 and $8,375 15% on the income between $8,375 and $34,000; plus $ % on the income between $34,000 and $82,400; plus $4, % on the income between $82,400 and $171,850; plus $16, % on the income between $171,850 and $373,650; plus $41, % on the income over $373,650; plus $108,421.25

Marginal Tax Rate – Married/Joint (2010) 10% on the income between $0 and $16,750 15% on the income between $16,750 and $68,000; plus $1,675 25% on the income between $68,000 and $137,300; plus $9, % on the income between $137,300 and $209,250; plus $26, % on the income between $209,250 and $373,650; plus $46, % on the income over $373,650; plus $101,085.50

Pollution & Sin Taxes Taxes/fines imposed to discourage types of activities – Tax/fine on pollution emissions – Fines for littering, disturbing the peace, possessing a defective muffler – Taxes on cigarettes, alcohol, legal gambling Is it the govt.’s responsibility to encourage/discourage certain types of activities by placing taxes/fines on them?

User Fees & Borrowing User fees – Money spent in order to be allowed to use a public good – Entrance fees to state parks – Tuition for college Govts. borrow from households/firms to fund public programs – Constructing highways, airports, schools – Projects are paid for by future taxpayers