2. Principles of Tax Policy
Efficiency
minimize excess burden
low compliance costs
easy to administer
Equity
normative in nature

3. Benefit Principle
People who benefit from government expenditures should pay
Views a tax as a price paid for government supplied good
Appealing on equity grounds

4. Efficiency and Benefit Principle
Can minimize excess burden of taxation
Features of a user charge
Can act as a rationing device

5. Actual Taxes and Benefit Principle
Share some characteristics of benefit principle
Example: Property taxes and education

6. Ability-to-Pay Principle
Individuals should pay taxes in proportion to ability to pay
Can apportion tax burden for activities undertaken for the public good
Redistribution programs

7. Implementing Ability to Pay
Is it fair for someone to pay more because of greater ability to pay?
When do people have same ability to pay?
How much more should person with higher income pay?

8. Horizontal Equity
People with equal ability to pay assessed same amount in taxes
Example: Deductions for children
Concept of equity may be at odds with benefit principle

9. Vertical Equity
People with greater abilities to pay should pay more in taxes
Does not specify how much more one should pay

10. Progressive, Proportional, and Regressive Taxes
Proportional tax
Percentage of taxpayers income
Progressive tax
Larger percentage of income as income rises
Regressive tax
Smaller percentage of income as income rises

11. Progressive, Proportional, and Regressive Taxes

12. Income and Consumption over Life Cycle

13. Sumptuary Taxes Designed to discourage consumption of taxed good
Excess burden of taxation
Possible rationale for sumptuary taxes:
Corrective tax on an externality
Legislating morality through tax system
Used to raise revenue

14. Sin Taxes and Healthy Living
[Insert Figure 11.3]

15. Politics and Tax Policy
Special interests and taxation
bias in tax policy to favor special interests over general public interests
Federal versus state and local taxation
special interests have greater influence on federal tax policy

16. Tax Reform Major overhaul recommended over piecemeal reform
Can withstand negative influence of special interests
More likely to simplify tax code

17. Tax Policy in Real World
Equity and efficiency
Individual taxes versus the tax system