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