Tax Evaluation and Income Tax
How responsive is the tax base to economic growth
Depends on elasticity and the elasticity will fluctuate in bad economic times. More elastic items for taxing - luxury goods Less elastic items for taxing - household necessities and fuel
Economic Efficiency
Do taxes change behavior such as: - How much to work and earn - Investments/ Savings - Consumption (higher tax on tobacco etc) - Production Decision ( where to produce goods, carbon emissions)
Important considerations with tax collectability
Ease of collection Enforcement mechanism Likelihood of compliance
What are the 6 tax policy evaluation criteria?
Equity, Collectability, Transparency, Economic Efficiency, Revenue Production/adequacy, Political Feasibility
Revenue Production
Govt. want more money they can raise tax rates but what is trade off in the economy (consider growth)
For income tax how is the marginal tax rate determined
It is the rate on the last dollar taxed
Within Vertical equity progressivity is assessed by comparing
Marginal, average and effective tax rates
political feasibility of taxation
Popularity is linked to salience - - sales tax and user fees have salience - property and income tax less so
Vertical Equity is assessed by its
Progressivity
Fiscal Illusion
Tax payers want govt. services but don't want to know they are paying for them
What is horizontal equity
Tax similar tax payers equally. Principle follows - same income/wealth = same ability to pay.
benefit principle of taxation
Taxes paid equal benefits received - rare in practice weaker version is Taxes approximate benefits received (ex. Property, gasoline tax)
What is vertical equity
Taxes rise alongside income and wealth
For income tax how is the average tax rate determined
dividing total taxes/by taxable income
For income tax how is the effective tax rate determined
dividing total taxes/by total income
What is Horizontal Equity
tax similar tax payers equally
What is Vertical Equity
taxes rise with income and wealth. Taxes within the vertical equity principle fall into 3 categories: 1. Progressive 2. Proportional 3. Regressive
What are the 3 categories within Vertical Equity?
1. Progressive 2. Proportional 3. Regressive
Tax collectability cost burden
1. Taxpayers 2. Income tax - compliance cost borne by taxpayers 3. Sales tax - collection costs borne by retailers 4. Property tax - costs associated with the need to assess properties
Within the Equity tax evaluation criteria there is the consideration of
1. The Benefit Principle: taxes paid should equal benefits received 2. Ability to Pay Principal: tax those who can afford it Vertical Equity- taxes rise with income and wealth Horizontal Equity - tax similar taxpayers equally
Tax Transparency considers
Adoption - was done openly Administered- is it done in a clear and fair manner have appeal process Compliance / Burden - does Public know how liability is determined and does it have saliency
What makes a tax regressive
The tax burden grows less than proportional as the ability to pay increases
What makes a tax progressive
The tax burden grows more than proportionally as the ability to pay increases
What makes a tax proportional
The tax burden remains constant as the ability to pay increases