ECON 1 Lecture Notes - Lecture 11: Deadweight Loss, Proportional Tax, Regressive Tax
#11 Tuesday 2/20 (Ch.12 The Tax System)
U.S Government Receipts, 1929 - 2010
Why Does the Government Intervene in the Economy?
Two main objectives:
(1) EFFICIENCY
- Finance public goods
- Correct externalities
(2) EQUITY:
To help those in need: food stamps, Medicaid, unemployment insurance, etc.
Ideal Tax System
● The ideal tax system is
○ (a) Efficient
○ (b) Fair
In practice there is a trade off between efficiency and equity
Efficiency
● One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost
to taxpayers.
○ Deadweight losses
Deadweight Losses
● Recall from Chapter 8:
Taxes distort incentives: people make decisions according to tax incentives rather than true costs and
benefits.
Document Summary
To help those in need: food stamps, medicaid, unemployment insurance, etc. In practice there is a trade off between efficiency and equity. One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers. Taxes distort incentives: people make decisions according to tax incentives rather than true costs and benefits. The fall in taxpayers" well-being exceeds the revenue the government collects. A small business owner makes ,000 before taxes. If tax is 20%, he keeps ,000 after taxes. If tax is 33%, he keeps ,000 after taxes. Example: a 25 year old person is considering saving . The interest rate in his saving account is. If no taxes: when he is 65, he has ,720. If income tax = 25%, when he is 65 he only has ,290. Some economists advocate taxing consumption instead of income. Better for retirement security and long-run economic growth.
