ECN 104 Lecture Notes - Lecture 8: Regressive Tax, Sales Tax, Flat Tax
Document Summary
According to the ability-to-pay principle of tax fairness, those with greater ability to pay a tax should pay more tax. The fairest taxes, in terms of the benefit or ability-to-pay principles, distort incentives and perform badly on efficiency grounds. In a well-designed tax system, there is a trade-off between equity and efficiency: the system can be made more efficient only by making it less fair, and vice versa. Every tax consists of two pieces: a base and a structure. The tax base is the value of assets on which tax can be imposed. The tax structure specifies how the tax rates depend on the tax base. Some important taxes and their tax bases are as follows. Incomes tax: a tax depends on the income of an individual or a family from wages and investments. Payroll tax: a tax that depends on the earnings a employer pays to an employee.