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Canada (161,958)
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ECN 104 (387)
Chapter 12

Chapter 12 Notes

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ECN 104
Tsogbadral Galaabaatar

ECN104 – Week 5 Notes Chapter 12 • Questions o What are the largest sources of tax revenue in Canada? o What are the efficiency costs of taxes? o How can we evaluate the equity of a tax system? • Introduction o One of the Ten Principles from Chapter 1:  A government can sometimes improve market outcomes. • Providing public goods • Regulating use of common resources • Remedying the effects of externalities o To perform its many functions, the government raises revenue through taxation o Lessons about taxes from earlier chapters:  A tax on a good reduces the market quantity of that good  The burden of a tax is shared between buyers and sellers depending on the price elasticities of demand and supply  A tax causes a deadweight loss • A Financial Overview of Canadian Governments o Federalist Structure o Political power divided between federal government and provincial governments o Federal government has the greater power o Local and municipal governments are granted powers by the provincial government o Federal Government Responsibilities o Matters of national interest: national defense and foreign policy, international trade, competition policy, criminal law and money and banking o Delivery of some national social programs (e.g., Employment Insurance (EI) and Canadian Pension Plan (CPP)) o Has unlimited taxing powers o Provincial Government Responsibilities o Health care, education, welfare, natural resources within their boundaries, and civil law o Extensive taxing powers, but less than federal government o Account for more than half of activities by the public sector in Canada o The Federal Government: Receipts o The Canadian federal government collects about 40% of the taxes in our economy o The largest source of revenue for the federal government is the personal income tax, which accounts for almost half of total federal revenue o The Federal Government o Personal Income Taxes • The marginal tax rate is the tax rate applied to each additional dollar of income • Higher-income individuals pay a larger percentage of their income in taxes o The Federal Government: Spending o Federal spending goes to interest on the debt and program spending • Old Age Security (OAS) • Canada Health and Social Transfer (transfers to the provinces) • Employment Insurance payments (EI) • National defense o The Federal Government: Budget Balance  Budget Surplus: An excess of government receipts over government spending  Budget Deficit: An excess of government spending over government receipts o Provincial/Territorial and Local Government: Receipts  Provincial /territorial and local governments collect about 50% of taxes in the economy  Let’s look at how they obtain tax revenue and how they spend it  Provincial and local governments collect more than 50% of taxes in the economy: • Transfers from the federal government • Personal income taxes • General sales taxes • Excise taxes • Property taxes • Corporate income taxes • Health premiums and payroll taxes • Taxes and Efficiency o Policymakers have two objectives in designing a tax system  Efficiency  Equity o One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers o The costs to taxpayers include:  The tax payment itself  Deadweight losses  Administrative burden • Deadweight Losses o One of the Ten Principles:  People respond to incentives. o Recall from Chapter 8:  Taxes distort incentives, cause people to allocate resources according to tax incentives rather than true costs and benefits o The result: a deadweight loss  The fall in taxpayers’ well-being exceeds the revenue the government collects • Administrative Burden o Includes the time and money people spend to comply with tax laws o Encourages the expenditure of resources on legal tax avoidance  E.g., hiring accountants to exploit “loopholes” to reduce one’s tax burden o Is a type of deadweight loss o Could be reduced if the tax code were simplified but would require removing loopholes, politically difficult • Marginal vs Average Tax Rates o Average Tax Rate:  Total taxes paid divided by total income  Measures the sacrifice a taxpayer makes o Marginal Tax Rate:  The extra taxes paid on an additional dollar of income  Measures the incentive effects of taxes on work effort, saving, etc. • Lump-Sum Taxes o Same for every person o E.g., lump-sum tax = $4000/person Income Average Tax Rate
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