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CHAPTER 12 Taxes on Economic Transactions PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Excise Taxes, Unit Taxes, Ad Valorem Taxes Excise tax Placed on sale of specific good/service Unit tax Certain amount per unit of good sold Ad valorem tax Fixed percentage of value of taxed goods PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Unit Taxes Versus Ad Valorem Taxes PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Unit Taxes Versus Ad Valorem Taxes PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Unit Taxes versus Ad Valorem Taxes Fluctuation in price of good Amount per unit from unit tax unchanged Amount per unit from ad valorem tax fluctuates PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Unit Taxes and Ad Valorem Taxes Advantages of unit taxes Disadvantages Favor expensive units Inflation can have adverse effect on real tax Advantages of ad valorem taxes Amount of tax not affected by price of good Unaffected in real terms by inflation Disadvantages Less appropriate when value of a good cannot be easily determined PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Revenues from Excise Taxes Small source of government revenue Closely related to user charges at federal level PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe User Charges and Efficiency Minimize excess burden of taxation Acts as price for public sector output Acts as rationing device May be desirable even when marginal cost is zero PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe User Charges and Demand Revelation Allow producers to gauge consumer demand PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe User Charges and Equity Satisfy benefit principle of taxation Disadvantages: redistributional programs Difficult to determine who benefits and how benefits are shared Costly to charge user fees because of nonexcludability PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Approximating User Charges in the Real World User charges may be difficult to approximate User Charges as Taxes Similar to market prices Are among most effective and fair methods of taxation when feasible PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe User Charges and Public Enterprise Output can be provided more efficiently when user fees employed as method of taxation Revenues and User Fees Makes up substantial amount of state and local government revenues PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Import and Export Taxes Import duty (tariff) – tax levied on imported goods Easy transactions to monitor and collect Important source of revenue for less developed countries PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Import Taxes and Trade Restrictions Used in developed countries to discourage imports Trade barriers politically produced protection for domestic industries Reduction of trade barriers would increase value of total world output PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Quotas Law restricting quantity of good that can be imported No tax is collected Less beneficial than a tariff to public More beneficial to interest groups PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Effects of Quotas and Tariffs PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Trade Agreements Established to keep trade barriers low Countries agree not to subsidize exporting industries GATT, WTO, EU, NAFTA PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe General Sales Taxes Ad Valorem tax on all retail sales Effects similar to an excise tax Restricts level of output Raises prices Approximates tax on taxpayer’s level of consumption PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Is the Sales Tax Regressive? Often viewed as regressive with respect to income Should consider income over life cycle Sales Taxes and the Internet Cannot tax internet access Fear that internet will lead to decline in state sales tax revenues Streamlined Sales Tax Project PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Income and Substitution Effects Substitution effect Increased relative price causes substitution from one good to another Income effect Effect of lowering an individual’s income PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Possible Effects of a Consumption Tax PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Turnover Taxes Paid as fixed percentage of value of transaction Taxes all transactions Inefficient, discourages transactions Encourages vertical integration PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Value Added Tax (VAT) Tax on value added by each producer in economy PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe VAT versus Sales Tax VAT Levied on suppliers No need to distinguish between retail and wholesale purchasers Sales tax Levied on demanders Easier to collect Easier to calculate PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Value Added Tax in European Union European Community nations use a VAT as major source of revenue Taxes on goods and services are heavier than in the U.S. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Visibility of the Tax More difficult to evade a VAT Taxpayers may be less resistant to paying the tax May be politically more popular than a sales tax because its effects are more likely to be misunderstood PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe