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Public Choice Theory and the Economics of Taxation

Public Choice Theory and the Economics of Taxation. PUBLIC CHOICE THEORY. Majority Voting. Fails to take into account the strength of the preferences of individual voters. PUBLIC CHOICE THEORY. Majority Voting:. Inefficient Voting Outcomes. COMPARE $300 TAX TO PERSONAL.

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Public Choice Theory and the Economics of Taxation

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  1. Public Choice Theoryand theEconomics of Taxation

  2. PUBLIC CHOICE THEORY Majority Voting Fails to take into account the strength of the preferences of individual voters.

  3. PUBLIC CHOICE THEORY Majority Voting: Inefficient Voting Outcomes COMPARE $300 TAX TO PERSONAL BENEFIT OF A PUBLIC GOOD The “No” Votes Win but, the decision is inefficient… Adams- BENEFIT $700 - "YES" Benson- BENEFIT $250 - "NO" Conrad- BENEFIT $200 - "NO"

  4. PUBLIC CHOICE THEORY An Inefficient “NO”Vote The NO vote wins but is inefficient since... $700 Benefit; Tax $300 $250 $200 (YES) (NO) (NO) Conrad Benson Adams

  5. PUBLIC CHOICE THEORY An Inefficient “NO”Vote The NO vote wins but is inefficient since... MSB $1,150 > MSC $900 $700 Benefit; Tax $300 $250 $200 (YES) (NO) (NO) Conrad Benson Adams

  6. U.S. Tax Structure

  7. TAX STRUCTURES Who pays the tax? • Benefits-Received Principle • Ability-to-Pay Principle Tax as a percentage of income: • Progressive Tax • Regressive Tax • Proportional Tax

  8. TAX APPLICATIONS: Identify whether progressive, regressive, or proportional • Personal Income Tax • Progressive • Sales Tax • Regressive • Corporate Income Tax • Proportional • Payroll Taxes • Regressive • Property Taxes • Regressive • Estate & Gift Taxes • Progressive

  9. HIGHEST TAX BRACKETS BY DECADE

  10. TAX INCIDENCE AND EFFICIENCY LOSS • Revisiting the role of elasticity (ED& ES) • More elastic curves create more DWL • More inelastic curve pays more of the tax • Why tax if it creates DWL? • Redistributive Goals • Reducing Negative Externalities

  11. Supply Size of tax Demand Tax Distortions and Elasticities Inelastic Demand Price Quantity 0

  12. THE U.S. TAX STRUCTURE TAX PROGRESSIVITY IN AMERICA • Federal Tax System • Progressive • State and Local Tax • Largely Regressive • Overall U. S. Tax System • Progressive

  13. How Much Tax do the Rich Pay?

  14. Taxes and Government Spending

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