Tài liệu Ten Principles of Economics - Part 26 ppt

CHAPTER 12 THE DESIGN OF THE TAX SYSTEM 259 We can fix the problem for John and Joan by raising the income exclusion from $10,000 to $20,000 for married couples. But this change would create an- other problem. In this case, Sam and Sally would pay a tax after getting married of only $20,000, which is $2,500 less than they paid when they were single. Elim- inating the marriage tax for John and Joan would create a marriage subsidy for Sam and Sally. In practice, the U.S. tax code is an uneasy compromise that includes a com- bination of marriage taxes and marriage subsidies. According to a study by the Congressional Budget Office, 42 percent of married couples pay a marriage tax, averaging 2.0 percent of their income, while 51 percent of married couples pay lower taxes by virtue of being wed, averaging 2.3 percent of their income. Whether a couple is better off (from a tax standpoint) being married or shacked up depends on how earnings are split between the two partners. If a man and woman have similar incomes (like John and Joan), their wedding will most likely raise their tax bill. But a marriage subsidy is likely if one partner earns much more than the other, and especially if only one of them has earnings (like Sam and Sally). This problem has no simple solution. To see why, try designing an income tax with the following four properties: ◆ Two married couples with the same total income should pay the same tax. ◆ When two people get married, their total tax bill should not change. ◆ A person or family with no income should pay no taxes. ◆ High-income taxpayers should pay a higher fraction of their incomes than low-income taxpayers. All four of these properties are appealing, yet it is impossible to satisfy all of them simultaneously. Any income tax that satisfies the first three must violate the fourth. The only income tax that satisfies the first three properties is a pro- portional tax. Some economists have advocated abolishing the marriage penalty by mak- ing individuals rather than the family the taxpaying unit, a policy that many European countries follow. This alternative might seem more equitable because it would treat married and unmarried couples the same. Yet this change would give up on the first of these properties: Families with the same total income could end up paying different taxes. For example, if each married couple paid taxes as if they were not married, then Sam and Sally would pay $22,500, and John and Joan would pay $20,000, even though both couples have the same to- tal income. Whether this alternative tax system is more or less fair than the cur- rent marriage tax is hard to say. TAX INCIDENCE AND TAX EQUITY Tax incidence—the study of who bears the burden of taxes—is central to evaluat- ing tax equity. As we first saw in Chapter 6, the person who bears the burden of a tax is not always the person who gets the tax bill from the government. Because taxes alter supply and demand, they alter equilibrium prices. As a result, they affect people beyond those who, according to statute, actually pay the tax. When 260 PART FOUR THE ECONOMICS OF THE PUBLIC SECTOR CASE STUDY WHO PAYS THE CORPORATE INCOME TAX? The corporate income tax provides a good example of the importance of tax in- cidence for tax policy. The corporate tax is popular among voters. After all, cor- porations are not people. Voters are always eager to have their taxes reduced and have some impersonal corporation pick up the tab. But before deciding that the corporate income tax is a good way for the gov- ernment to raise revenue, we should consider who bears the burden of the cor- porate tax. This is a difficult question on which economists disagree, but one thing is certain: People pay all taxes. When the government levies a tax on a cor- poration, the corporation is more like a tax collector than a taxpayer. The bur- den of the tax ultimately falls on people—the owners, customers, or workers of the corporation. Many economists believe that workers and customers bear much of the burden of the corporate income tax. To see why, consider an example. Suppose that the U.S. government decides to raise the tax on the income earned by car companies. At first, this tax hurts the owners of the car companies, who receive less profit. But, over time, these owners will respond to the tax. Because pro- ducing cars is less profitable, they invest less in building new car factories. In- stead, they invest their wealth in other ways—for example, by buying larger houses or by building factories in other industries or other countries. With fewer car factories, the supply of cars declines, as does the demand for auto- workers. Thus, a tax on corporations making cars causes the price of cars to rise and the wages of autoworkers to fall. The corporate income tax shows how dangerous the flypaper theory of tax incidence can be. The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the tax—the customers and workers of corporations—are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters. CASE STUDY THE FLAT TAX A recurring topic of debate is whether the U.S. federal government should com- pletely scrap the current tax system and replace it with a much simpler system evaluating the vertical and horizontal equity of any tax, it is important to take ac- count of these indirect effects. Many discussions of tax equity ignore the indirect effects of taxes and are based on what economists mockingly call the flypaper theory of tax incidence. Ac- cording to this theory, the burden of a tax, like a fly on flypaper, sticks wherever it first lands. This assumption, however, is rarely valid. For example, a person not trained in economics might argue that a tax on ex- pensive fur coats is vertically equitable because most buyers of furs are wealthy. Yet if these buyers can easily substitute other luxuries for furs, then a tax on furs might only reduce the sale of furs. In the end, the burden of the tax will fall more on those who make and sell furs than on those who buy them. Because most work- ers who make furs are not wealthy, the equity of a fur tax could be quite different from what the flypaper theory indicates. THIS WORKER PAYS PART OF THE CORPORATE INCOME TAX . CHAPTER 12 THE DESIGN OF THE TAX SYSTEM 261 called the flat tax. The flat tax was proposed in the early 1980s by economist Robert Hall and political scientist Alvin Rabushka. Since then, it has from time to time caught the attention of politicians on both the political left (such as Jerry Brown, former governor of California and sometime candidate in the Demo- cratic presidential primaries) and the political right (such as Steve Forbes, multi- millionaire publisher and sometime candidate in the Republican presidential primaries). Although flat-tax advocates have proposed various plans that differ in de- tail, the essence of all the plans is a single, low tax rate that would apply to all income in the economy. If the tax rate were set at 19 percent, for example, then every taxpayer in the economy would face a marginal tax rate of 19 percent. Most of the plans allow a certain amount of income to be excluded from the tax. If the income exclusion were $10,000, for instance, then a person’s tax bill would be Tax ϭ 0.19 ϫ (Income Ϫ $10,000). Because of the income exclusion, a flat tax can be progressive: Average tax rates rise with income, even though the marginal tax rate is constant. Some of the plans even allow a person with very low income (in this example, less than $10,000) to pay a “negative tax” by receiving a check from the government. Because the flat-tax proposal calls for a major overhaul of the tax system, it raises almost every issue discussed in this chapter, especially the tradeoff between efficiency and equity. Here are some of the points made by flat-tax advocates: ◆ The flat tax would eliminate many of the deductions allowed under the current income tax, such as deductions for mortgage interest payments and charitable giving. By broadening the tax base in this way, the flat tax is able to reduce the marginal tax rates that most people face. Lower tax rates mean greater economic efficiency. Thus, flat-tax advocates claim that this change would expand the size of the economic pie. ◆ Because the flat tax is so simple, the administrative burden of taxation would be greatly reduced. Flat-tax advocates claim that many taxpayers could file their returns on a postcard. Because all taxpayers would pay the same low tax rate on all forms of income, people would have less incentive to hire tax lawyers and accountants to take advantage of loopholes. ◆ Because all taxpayers would face the same marginal tax rate, the tax could be collected at the source of income rather than from the person who receives the income. Income from corporate profit, for instance, would be taxed at the corporate level rather than at the personal level. This additional simplification also reduces administrative costs. ◆ The flat tax would replace both the personal income tax and the corporate income tax. All income, whether from working at a job or from owning shares in a corporation, would be taxed once at the same marginal rate. The flat tax would eliminate the current double taxation of corporate profits, which now discourages corporations from investing in new plants and equipment. 262 PART FOUR THE ECONOMICS OF THE PUBLIC SECTOR ◆ In computing income for tax purposes, businesses would be allowed to deduct all legitimate business expenses, including expenses on new investment goods. This deduction for investment makes the flat tax more like a consumption tax than an income tax. As a result, a change to a flat tax would increase the incentive to save (or, more precisely, would eliminate the current tax system’s disincentive to save). In short, advocates of the flat tax claim that there is a strong efficiency argument for this dramatic tax reform. Critics of the flat tax are sympathetic with the goal of a simpler and more ef- ficient tax system, but they oppose the flat tax because they believe that it gives too little weight to the goal of vertical equity. They claim that a flat tax would be less progressive than the current tax system and, in particular, would shift some of the tax burden from the wealthy to the middle class. This concern may well be justified, but no one knows for sure. Our study of tax incidence shows that the burden of a tax is not necessarily borne by the person who sends the check to the government. If the flat tax did encourage greater saving, as advocates claim, it would lead to more rapid economic growth, which would benefit all taxpayers. No one can be certain, however, about how large the impact on eco- nomic growth would be. QUICK QUIZ: Explain the benefits principle and the ability-to-pay principle. ◆ What are vertical equity and horizontal equity? ◆ Why is studying tax incidence important for determining the equity of a tax system? CONCLUSION: THE TRADEOFF BETWEEN EQUITY AND EFFICIENCY Almost everyone agrees that equity and efficiency are the two most important goals of the tax system. But often these two goals conflict. Many proposed changes in the tax laws increase efficiency while reducing equity, or increase equity while reducing efficiency. People disagree about tax policy often because they attach dif- ferent weights to these two goals. The recent history of tax policy shows how political leaders differ in their views on equity and efficiency. When Ronald Reagan was elected president in 1980, the marginal tax rate on the earnings of the richest Americans was 50 per- cent. On interest income, the marginal tax rate was 70 percent. Reagan argued that such high tax rates greatly distorted economic incentives to work and save. In other words, he claimed that these high tax rates cost too much in terms of eco- nomic efficiency. Tax reform was, therefore, a high priority of his administration. Reagan signed into law large cuts in tax rates in 1981 and then again in 1986. When Reagan left office in 1989, the richest Americans faced a marginal tax rate of only 28 percent. During the four years of the Bush presidency, the top tax rate increased slightly to 31 percent. When Bill Clinton ran for president in 1992, he argued that the rich were not paying their fair share of taxes. In other words, the low tax rates on the rich CHAPTER 12 THE DESIGN OF THE TAX SYSTEM 263 violated his view of vertical equity. One of President Clinton’s first acts was to pro- pose raising the tax rates on the highest levels of income. In 1993 the tax rates on the richest Americans became about 40 percent. Economics alone cannot determine the best way to balance the goals of effi- ciency and equity. This issue involves political philosophy as well as economics. But economists do have an important role in the political debate over tax policy: They can shed light on the tradeoffs that society faces and can help us avoid poli- cies that sacrifice efficiency without any benefit in terms of equity. ◆ The U.S. government raises revenue using various taxes. The most important taxes for the federal government are individual income taxes and payroll taxes for social insurance. The most important taxes for state and local governments are sales taxes and property taxes. ◆ The efficiency of a tax system refers to the costs it imposes on taxpayers. There are two costs of taxes beyond the transfer of resources from the taxpayer to the government. The first is the distortion in the allocation of resources that arises as taxes alter incentives and behavior. The second is the administrative burden of complying with the tax laws. ◆ The equity of a tax system concerns whether the tax burden is distributed fairly among the population. According to the benefits principle, it is fair for people to pay taxes based on the benefits they receive from the government. According to the ability-to-pay principle, it is fair for people to pay taxes based on their capability to handle the financial burden. When evaluating the equity of a tax system, it is important to remember a lesson from the study of tax incidence: The distribution of tax burdens is not the same as the distribution of tax bills. ◆ When considering changes in the tax laws, policymakers often face a tradeoff between efficiency and equity. Much of the debate over tax policy arises because people give different weights to these two goals. Summary budget surplus, p. 248 budget deficit, p. 248 average tax rate, p. 252 marginal tax rate, p. 252 lump-sum tax, p. 254 benefits principle, p. 255 ability-to-pay principle, p. 255 vertical equity, p. 256 horizontal equity, p. 256 proportional tax, p. 256 regressive tax, p. 256 progressive tax, p. 256 Key Concepts 1. Over the past several decades, has government grown more or less slowly than the rest of the economy? 2. What are the two most important sources of revenue for the U.S. federal government? 3. Explain how corporate profits are taxed twice. 4. Why is the burden of a tax to taxpayers greater than the revenue received by the government? 5. Why do some economists advocate taxing consumption rather than income? 6. Give two arguments why wealthy taxpayers should pay more taxes than poor taxpayers. 7. What is the concept of horizontal equity, and why is it hard to apply? 8. Describe the arguments for and against replacing the current tax system with a flat tax. Questions for Review 264 PART FOUR THE ECONOMICS OF THE PUBLIC SECTOR 1. Government spending in the United States has grown as a share of national income over time. What changes in our economy and our society might explain this trend? Do you expect the trend to continue? 2. In a published source or on the Internet, find out whether the U.S. federal government had a budget deficit or surplus last year. What do policymakers expect to happen over the next few years? (Hint: The Web site of the Congressional Budget Office is www.cbo.gov.) 3. The information in many of the tables in this chapter is taken from the Economic Report of the President, which appears annually. Using a recent issue of the report at your library, answer the following questions and provide some numbers to support your answers. a. Figure 12-1 shows that government revenue as a percentage of total income has increased over time. Is this increase primarily attributable to changes in federal government revenue or in state and local government revenue? b. Looking at the combined revenue of the federal government and state and local governments, how has the composition of total revenue changed over time? Are personal income taxes more or less important? Social insurance taxes? Corporate profits taxes? c. Looking at the combined expenditures of the federal government and state and local governments, how have the relative shares of transfer payments and purchases of goods and services changed over time? 4. The chapter states that the elderly population in the United States is growing more rapidly than the total population. In particular, the number of workers is rising slowly, while the number of retirees is rising quickly. Concerned about the future of Social Security, some members of Congress propose a “freeze” on the program. a. If total expenditures were frozen, what would happen to benefits per retiree? To tax payments per worker? (Assume that Social Security taxes and receipts are balanced in each year.) b. If benefits per retiree were frozen, what would happen to total expenditures? To tax payments per worker? c. If tax payments per worker were frozen, what would happen to total expenditures? To benefits per retiree? d. What do your answers to parts (a), (b), and (c) imply about the difficult decisions faced by policymakers? 5. Suppose you are a typical person in the U.S. economy. You pay a flat 4 percent of your income in a state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employee shares combined). You also pay federal income taxes as in Table 12-3. How much tax of each type do you pay if you earn $20,000 a year? Taking all taxes into account, what are your average and marginal tax rates? What happens to your tax bill and to your average and marginal tax rates if your income rises to $40,000? 6. Some states exclude necessities, such as food and clothing, from their sales tax. Other states do not. Discuss the merits of this exclusion. Consider both efficiency and equity. 7. Explain how individuals’ behavior is affected by the following features of the federal tax code. a. Contributions to charity are tax deductible. b. Sales of beer are taxed. c. Interest that a homeowner pays on a mortgage is tax deductible. d. Realized capital gains are taxed, but accrued gains are not. (When someone owns a share of stock that rises in value, she has an “accrued” capital gain. If she sells the share, she has a “realized” gain.) 8. Suppose that your state raises its sales tax from 5 percent to 6 percent. The state revenue commissioner forecasts a 20 percent increase in sales tax revenue. Is this plausible? Explain. 9. Consider two of the income security programs in the United States: Temporary Assistance for Needy Families (TANF) and the Earned Income Tax Credit (EITC). a. When a woman with children and very low income earns an extra dollar, she receives less in TANF benefits. What do you think is the effect of this feature of TANF on the labor supply of low-income women? Explain. b. The EITC provides greater benefits as low-income workers earn more income (up to a point). What do you think is the effect of this program on the labor supply of low-income individuals? Explain. Problems and Applications CHAPTER 12 THE DESIGN OF THE TAX SYSTEM 265 c. What are the disadvantages of eliminating TANF and allocating the savings to the EITC? 10. The Tax Reform Act of 1986 eliminated the deductibility of interest payments on consumer debt (mostly credit cards and auto loans) but maintained the deductibility of interest payments on mortgages and home equity loans. What do you think happened to the relative amounts of borrowing through consumer debt and home equity debt? 11. Categorize each of the following funding schemes as examples of the benefits principle or the ability-to-pay principle. a. Visitors to many national parks pay an entrance fee. b. Local property taxes support elementary and secondary schools. c. An airport trust fund collects a tax on each plane ticket sold and uses the money to improve airports and the air traffic control system. 12. Any income tax schedule embodies two types of tax rates—average tax rates and marginal tax rates. a. The average tax rate is defined as total taxes paid divided by income. For the proportional tax system presented in Table 12-7, what are the average tax rates for people earning $50,000, $100,000, and $200,000? What are the corresponding average tax rates in the regressive and progressive tax systems? b. The marginal tax rate is defined as the extra taxes paid on additional income divided by the increase in income. Calculate the marginal tax rate for the proportional tax system as income rises from $50,000 to $100,000. Calculate the marginal tax rate as income rises from $100,000 to $200,000. Calculate the corresponding marginal tax rates for the regressive and progressive tax systems. c. Describe the relationship between average tax rates and marginal tax rates for each of these three systems. In general, which rate is relevant for someone deciding whether to accept a job that pays slightly more than her current job? Which rate is relevant for judging the vertical equity of a tax system? 13. What is the efficiency justification for taxing consumption rather than income? If the United States were to adopt a consumption tax, do you think that would make the U.S. tax system more or less progressive? Explain. 14. If a salesman takes a client to lunch, part of the cost of the lunch is a deductible business expense for his company. Some members of Congress have argued that this feature of the tax code benefits relatively wealthy businesspeople and should be eliminated. Yet their arguments have been met with greater opposition from eating and drinking establishments than from companies themselves. Explain. IN THIS CHAPTER YOU WILL . . . Examine the relationship between short-run and long-run costs Learn the meaning of average total cost and marginal cost and how they are related Examine what items are included in a firm’s costs of production Analyze the link between a firm’s production process and its total costs Consider the shape of a typical firm’s cost curves The economy is made up of thousands of firms that produce the goods and ser- vices you enjoy every day: General Motors produces automobiles, General Electric produces lightbulbs, and General Mills produces breakfast cereals. Some firms, such as these three, are large; they employ thousands of workers and have thou- sands of stockholders who share in the firms’ profits. Other firms, such as the local barbershop or candy store, are small; they employ only a few workers and are owned by a single person or family. In previous chapters we used the supply curve to summarize firms’ produc- tion decisions. According to the law of supply, firms are willing to produce and sell a greater quantity of a good when the price of the good is higher, and this response leads to a supply curve that slopes upward. For analyzing many questions, the law of supply is all you need to know about firm behavior. In this chapter and the ones that follow, we examine firm behavior in more de- tail. This topic will give you a better understanding of what decisions lie behind THE COSTS OF PRODUCTION 269 270 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY the supply curve in a market. In addition, it will introduce you to a part of eco- nomics called industrial organization—the study of how firms’ decisions regarding prices and quantities depend on the market conditions they face. The town in which you live, for instance, may have several pizzerias but only one cable televi- sion company. How does this difference in the number of firms affect the prices in these markets and the efficiency of the market outcomes? The field of industrial or- ganization addresses exactly this question. As a starting point for the study of industrial organization, this chapter exam- ines the costs of production. All firms, from Delta Air Lines to your local deli, in- cur costs as they make the goods and services that they sell. As we will see in the coming chapters, a firm’s costs are a key determinant of its production and pricing decisions. Establishing what a firm’s costs are, however, is not as straightforward as it might seem. WHAT ARE COSTS? We begin our discussion of costs at Hungry Helen’s Cookie Factory. Helen, the owner of the firm, buys flour, sugar, flavorings, and other cookie ingredients. She also buys the mixers and ovens and hires workers to run this equipment. She then sells the resulting cookies to consumers. By examining some of the issues that He- len faces in her business, we can learn some lessons that apply to all firms in the economy. TOTAL REVENUE, TOTAL COST, AND PROFIT We begin with the firm’s objective. To understand what decisions a firm makes, we must understand what it is trying to do. It is conceivable that Helen started her firm because of an altruistic desire to provide the world with cookies or, perhaps, out of love for the cookie business. More likely, however, Helen started her busi- ness to make money. Economists normally assume that the goal of a firm is to max- imize profit, and they find that this assumption works well in most cases. What is a firm’s profit? The amount that the firm receives for the sale of its out- put (cookies) is called its total revenue. The amount that the firm pays to buy in- puts (flour, sugar, workers, ovens, etc.) is called its total cost. Helen gets to keep any revenue that is not needed to cover costs. We define profit as a firm’s total rev- enue minus its total cost. That is, Profit ϭ Total revenue Ϫ Total cost. Helen’s objective is to make her firm’s profit as large as possible. To see how a firm goes about maximizing profit, we must consider fully how to measure its total revenue and its total cost. Total revenue is the easy part: It equals the quantity of output the firm produces times the price at which it sells its output. If Helen produces 10,000 cookies and sells them at $2 a cookie, her total revenue is $20,000. By contrast, the measurement of a firm’s total cost is more subtle. total revenue the amount a firm receives for the sale of its output total cost the market value of the inputs a firm uses in production profit total revenue minus total cost . double taxation of corporate profits, which now discourages corporations from investing in new plants and equipment. 262 PART FOUR THE ECONOMICS OF THE PUBLIC. who bear the ultimate burden of the tax—the customers and workers of corporations—are often not rich. If the true incidence of the corporate tax were more