Chapter 16 Efficient and Equitable taxation

Ramsey Rule Says that to minimize total excess burden, tax rates should be set so that the percentage reduction in the quantity demanded of each commodity is the same. To minimize overall excess burden, the marginal excess burden of the last dollar raised should be same for each commodity -otherwise raise revenues from commodity with lower marginal excess burden Also DWL increases with higher t

A Reinterpretation of the Ramsey Rule inverse elasticity rule

Efficiency Implications balancing factors Elasticity rule: Highly elastic goods taxed at low rates, low elasticity goods at high rates Broad base rule:better to tax wide variety of goods at moderate rates than a few at high rates

Costs of Running the Tax System Costs of administering the income tax in the U.S. Types of costs Compliance Administration These issues affect base, rates, levels of evasion

Tax Evasion Evasion versus Avoidance Policy Perspective: Architectural Tax Avoidance Methods of tax evasion Keeping two sets of books Moonlight for cash Barter Deal in cash

Positive Analysis of Tax Evasion MC = p * marginal penalty MC = p * marginal penalty $ $ MB = t MB = t R* (Dollars of underreporting) R* = 0 (Dollars of underreporting)