ECON 1203 CHAPTER 10- THE GOVERNMENT IN THE ECONOMY: TAXATION AND REGULATION

3 Levels of Government

-Federal -State -Local

where does the (federal) money come from?

1. Individual income taxes- 47% of total revenues 2. Payroll taxes (withheld from pay)- 36% of total revenue 3. Corporate income tax (taxes on profits)-7% of total revenue 4. Other taxes (including taxes on specific goods such as excise taxes)- 9% of total revenue

Where does the (state and local) money come from?

1. Other- 30% tolls, taxes on licenses 2.Revenue from federal government 25% federal taxes redistributed to state/ local govts 3. Property taxes 17% 4. Sales taxes 17% 5. Individual income taxes 10%

Why do governments tax and spend

1. Raise revenues to pay for public goods 2. Redistribute income to address fairness issues 3. Finance operations of government 4. Correct market failures and externalities

Government should help consumers make choices because:

1. Some decisions are very complex and individuals don't have enough information 2. If an individual behavior benefits the larger society, the government should encourage that behavior

Consumers should be allowed to make their own choices because:

1. The government can't know what's best for us 2. The government can't be trusted to act in our best interests 3. If the government intervenes, there are costs

government intervention in markets can cause

1. deadweight losses 2. Increased costs due to bureaucracy 3. Corruption 4. Black markets

Consumer Sovereignty vs. Paternalism

Consumers know best: unfettered choice Consumers may not know best: government can help guide consumer choice

The case for government intervention

Consumers know best: unfettered choice Consumers may not know best: government can help guide consumer choice

The Case for Consumer sovereignty

Consumers know consumer choice best: unfettered choice Consumers may not know best: government can help guide

Redistribute income to address fairness issues

Governments can address equity issues through (transfer payments and tax structure)

corruption

Misuse of public funds Can be a cost of government activity Not confined to government sector exists in private sector as wel

Is the entire burden of the tax always borne by those on whom it is​ imposed?

Not necessarily since the burden of the tax depends on price elasticity

price ceiling

a cap (or maximum) on the price

equity vs efficiency

allocation resources increasing social surplus

direct regulation

attempts by the government to control the amount of an activity also called command and control regulation

price controls

attempts by the government to control the price of an activity

the sources of revenue for state and local governments are ___ those of the federal government

different from

two main types of regulation

direct regulation and price controls

transfer payments

government payments to individuals or groups

consumer sovereignty suggests that

government should interfere with consumer choices

The largest source of revenue for the federal government is

individual income taxes

the largest source of revenue for state governments

miscellaneous taxes and fees, such as tolls on roads and public transportation tickets

financing operations

paying for the day-to-day running of governments

paternalism is the view that

people do not always know what is best for them, and government should encourage them to make the right choices

To reduce inequality and poverty in an​ economy, the government uses a​ ___________.

progressive tax system to fund transfer payments

budget deficit

spending is greater than tax revenues

progressive tax system

system where average and marginal tax rates are higher for higher income levels

proportional tax system

system where everyone pays the same proportion of their income in taxes, regardless of how much their income is; i.e., marginal and average tax rates are the same for everyone

regressive tax system

system where the lower the income, the higher percentage of income is paid in taxes; i.e., marginal and average tax rates fall as income rises

budget surplus

tax revenues are greater than spending

correcting market failures and externalities

taxes are not usually levied to deal with a specific market failure

Bureaucratic costs

the greater the number of regulations= the greater the number of government workers needed to enforce them costs vs. benefits

marginal tax rate

the rate paid on the last dollar of income

average tax rate

total taxes divided by total income

Tax incidence refers to​ ____________.

who bear the burden of a tax

tax incidence

who bears the burden of a tax

In an attempt to help the​ poor, India announced a policy to implement price ceilings on several essential drugs in December 2012. Some industry​ analysts, however, claimed that this would actually end up hurting the poor more than helping them. Do you think this is a​ possibility? Explain your answer.

yes, it might hurt the poor by creating a shortage