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