1. UNIT 3: MACROECONOMICS: INSTITUTIONS LECTURE #2: SOURCES OF GOVERNMENT REVENUE

2. KEY TERMS: Sin tax Tax loophole Sales tax Proportional tax
Progressive tax
Marginal tax rate
Regressive tax

3. OBJECTIVE(S):
Students will be able to explain the economic impact of taxes
List three criteria for effective taxes
Understand the two primary principles of taxation
Understand how taxes are classified

4. I. ECONOMIC IMPACT OF TAXES
A. Resource Allocation
1. Taxes have an affect on the cost of production
Ex: Tax on a good or service raises cost of production thus shifting the supply curve in what direction?
To the LEFT Thus ? If demand remains unchanged?
Price will increase (how do people usually react?)
They Buy less
Ex: Congress enacted Luxury Tax (1991) on expensive items to raise taxes on Rich but these products were elastic so?
Price went up and drove demand down thus lead to much unemployment in those sectors of the economy

5. I. ECONOMIC IMPACT OF TAXES
B. Behavior Adjustment
1. Taxes often used to encourage or discourage certain types of activities
Ex: tax deduction allowed on home interest loans (what is this meant to encourage)
Home Ownership
Ex: No Tax deduction for credit card interest rates
Discourage use of credit cards’
2. Sin Tax – a relatively high tax designed to raise revenue and reduce consumption of some undesirable product like alcohol or tobacco
Tobacco seems to be inelastic in U.S. , why?
Addictive behavior

6. I. ECONOMIC IMPACT OF TAXES
C. Productivity and Growth
1. Some people today think taxes are too high and that it affects their incentive to work
D. Incidence of Tax
1. The final burden of the tax
2. the more elastic the demand = the greater the portion of the tax that will be absorbed by the producer
3. The more inelastic demand – the greater the portion of the tax will be absorbed by the consumer.

7. II. CRITERIA FOR EFFECTIVE TAXES
A. The 3 criteria for taxes to be effective
1. Equity (Fairness):
What is seem as unfair are loopholes (exceptions or oversights in the tax law that allow some people and business to avoid paying taxes)
2. Simplicity – have to be understood by all
Individual income tax – most people hate them because they are hard to understand.
Sales Tax – This is simple and understandable everyone pays
3. Efficiency – easy to administer / successful generator of income
Individual income tax is easy to administer
Ex: of Unsuccessful (luxury tax on private aircraft 1991)

8. LETS CREATE A GRAPHIC ORGANIZER DEPICTING THE CRITERIA FOR TAXES TO BE EFFECTIVE

9. III. TWO PRINCIPLES OF TAXATION
1. Benefit Principle
A. those who benefit from government goods and services should pay in proportion to the amount of benefits they receive
(ex: Gas Tax – those who drive more on roads bare the burden of the gas tax)
(ex: Tire tax – Truckers pay more for tires they damage roads more thus pay for it)
B. Two Limitations of this Principle:
1. Many who receive the benefit are the least able to afford them like Welfare
2. Benefits are often hard to measure

10. III. TWO PRINCIPLES OF TAXATION
2. Ability-To-Pay Principle
The wealthier suffer less discomfort paying more than people with lower incomes

11. IV. TYPES OF TAXES A. Proportional Tax B. Progressive Tax
1. imposes the same percentage rate of taxation on everyone regardless of income
B. Progressive Tax
1. that imposes a higher percentage rate of taxation on persons with higher incomes
2. Usually use a marginal tax rate (percentage of income paid in taxes increases as income goes up)
C. Regressive Tax
1. imposes higher percentage rate of taxation on low incomes than on high incomes