POSC150 Lecture Notes - Lecture 30: Tax Incidence, Flat Tax, Laziness
2 May 2018
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● Taxation Debates
○ For most governments, taxation is primary source of revenue
■ It’s how we fund day to day government operations and special projects
○ Two factors that influence the level of taxation:
■ What one wants to spend government money on
■ Budget deficits that one is willing to have
○ Debates over levels of taxation are an implicit debate over what kinds of
programs government should have
■ It is therefore also implicitly about who gets what, when, and how… it is
therefore political
● Tax Incidence
○ Refers to the impact of a tax on a population
■ I.e. what social groups are paying the most (individually and collectively)
and what is the impact of this tax on levels of inequality?
○ 3 Questions:
■ Which income group pays the most taxes per person?
■ Which income group contributes the most money to the treasury?
■ What is the effect of this ta policy on income inequality?
● Tax Incidence - Proportional
○ “Flat Tax”
■ Everyone pays the same percentage of their income in taxes and tax
loopholes are eliminated
■ Example - everyone pays 10% of their income towards taxes
○ What income groups pays more individually?
■ Rich pay the largest amount in absolute terms
● I.e. 200k salary = 20k taxes
● I.e. 100k salary = 10k taxes
● I.e. 50k salary = 5k taxes
○ Which income group contributes the most to total tax revenue and why?
■ Middle Class because they are the largest income group
○ What is the effect of this on inequality?
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■ No effect - the differences between the income groups remain the same
● Tax Incidence - Progressive
○ Higher your income, the higher the tax rate
■ Lower your income, the lower the tax rate
● I.e. the lower your income, the smaller percentage of your total
income is paid in taxes
● I.e. the rich have so much money, that even paying a higher
percentage doesn’t have much of an impact on their overall
income
■ Example - rich pay 30%, middle class pay 20%, poor pay 10%
○ What income group pays more individually?
■ Rich pay the largest amount in absolute terms
○ Which income group contributes the most to total tax revenue and why?
■ Middle Class because they are the largest income group
○ What is the effect of this on inequality?
■ Reduces the gap between income groups
○ Redistributive - tax money from rich is used to provide direct and indirect benefits
to others
● Tax Incidence - Regressive
○ The lower your income, the larger a percentage of your total income is paid in
taxes
■ Applies to taxes where there is an income cap (social security)
● Everyone pays - but rich stop paying at around $115k
○ Therefore rich pay a smaller percentage of their total
income into this tax than the middle class or poor
■ Applies to “Sin/Excise” taxes and sales taxes on goods/services
● Everyone pays - but poor generally spend more of their income on
these goods
○ I.e. liquor, cigarettes, gambling, etc.
○ What income group pays more individually?
■ Rich pay the largest amount in absolute terms
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
For most governments, taxation is primary source of revenue. It"s how we fund day to day government operations and special projects. Two factors that influence the level of taxation: What one wants to spend government money on. Budget deficits that one is willing to have. Debates over levels of taxation are an implicit debate over what kinds of programs government should have. It is therefore also implicitly about who gets what, when, and how it is therefore political. Refers to the impact of a tax on a population. Everyone pays the same percentage of their income in taxes and tax loopholes are eliminated. Example - everyone pays 10% of their income towards taxes. No effect - the differences between the income groups remain the same. Higher your income, the higher the tax rate. Lower your income, the lower the tax rate. I. e. the lower your income, the smaller percentage of your total income is paid in taxes.
