Excise Taxes, Unit Taxes, Ad Valorem Taxes Placed on sale of specific good/service Unit tax Certain amount per unit of good sold Ad valorem tax Fixed percentage of value of taxed goods

Unit Taxes Versus Ad Valorem Taxes

Unit Taxes Versus Ad Valorem Taxes

Unit Taxes versus Ad Valorem Taxes Fluctuation in price of good Amount per unit from unit tax unchanged Amount per unit from ad valorem tax fluctuates

Unit Taxes and Ad Valorem Taxes Advantages of unit taxes Amount of tax not affected by price of good Disadvantages Favor expensive units Inflation can have adverse effect on real tax Advantages of ad valorem taxes Unaffected in real terms by inflation Less appropriate when value of a good cannot be easily determined

Revenues from Excise Taxes Small source of government revenue Closely related to user charges at federal level

User Charges and Efficiency Minimize excess burden of taxation Acts as price for public sector output Acts as rationing device May be desirable even when marginal cost is zero

User Charges and Demand Revelation Allow producers to gauge consumer demand

User Charges and Equity Satisfy benefit principle of taxation Disadvantages: redistributional programs Difficult to determine who benefits and how benefits are shared Costly to charge user fees because of non-excludability

Approximating User Charges in the Real World User charges may be difficult to approximate User Charges as Taxes Similar to market prices Are among most effective and fair methods of taxation when feasible

User Charges and Public Enterprise Output can be provided more efficiently when user fees employed as method of taxation Revenues and User Fees Makes up substantial amount of state and local government revenues

Import and Export Taxes Import duty (tariff) – tax levied on imported goods Easy transactions to monitor and collect Important source of revenue for less developed countries

Import Taxes and Trade Restrictions Used in developed countries to discourage imports Trade barriers politically produced protection for domestic industries Reduction of trade barriers would increase value of total world output

Quotas Law restricting quantity of good that can be imported No tax is collected Less beneficial than a tariff to public More beneficial to interest groups

Effects of Quotas and Tariffs

Trade Agreements Established to keep trade barriers low Countries agree not to subsidize exporting industries GATT, WTO, EU, NAFTA

General Sales Taxes Ad Valorem tax on all retail sales Effects similar to an excise tax Restricts level of output Raises prices Approximates tax on taxpayer’s level of consumption

Is the Sales Tax Regressive? Often viewed as regressive with respect to income Should consider income over life cycle Sales Taxes and the Internet Cannot tax internet access Fear that internet will lead to decline in state sales tax revenues Streamlined Sales Tax Project

Income and Substitution Effects Increased relative price causes substitution from one good to another Income effect Effect of lowering an individual’s income

Possible Effects of a Consumption Tax

Turnover Taxes Paid as fixed percentage of value of transaction Taxes all transactions Inefficient, discourages transactions Encourages vertical integration

Value Added Tax (VAT) Tax on value added by each producer in economy

VAT versus Sales Tax VAT Sales tax Levied on suppliers No need to distinguish between retail and wholesale purchasers Sales tax Levied on demanders Easier to collect Easier to calculate

Value Added Tax in European Union European Community nations use a VAT as major source of revenue Taxes on goods and services are heavier than in the U.S.

Visibility of the Tax More difficult to evade a VAT Taxpayers may be less resistant to paying the tax May be politically more popular than a sales tax because its effects are more likely to be misunderstood