The Tax System and the Distribution of Income Should the Government Use the Tax System to Reduce Inequality? After studying this chapter, you should be able to: Understand the tax system in the United States, including the principles of taxation that governments use to create tax policy. Understand the effect of price elasticity on tax incidence. Discuss the distribution of income in the United States, and understand the extent of income mobility. LEARNING OBJECTIVES 1 2 3 Tax laws affect economic incentives and economic activity, and can also affect fairness. The Tax System LEARNING OBJECTIVE 1 The most widely used taxes are these: Individual income taxes. Social insurance taxes. Sales taxes. Property taxes. Excise taxes. The Tax System An Overview of the U.S. Tax System 18 - 1 Federal, State, and Local Sources of Revenue, 2004 The Tax System Progressive and Regressive Taxes Regressive tax A tax where people with lower incomes pay a higher percentage of their income in tax than do people with higher incomes. Progressive tax A tax where people with lower incomes pay a lower percentage of their income in tax than do people with higher incomes. The Tax System Progressive and Regressive Taxes Federal Income Tax Brackets and Tax Rates for Single Taxpayers, 2005 18 ? 1 35 Over $326,451 33 $150,151 to $326,450 28 $71,951 to $150,150 25 $29,701 to $71,950 15 $7,301 to $29,700 10% 0 to $7,300 TAX RATE INCOME Federal Income Tax Paid on Taxable Income of $100,000, 2005 18 ? 2 $22,507 His total tax payment $7,854 last $28,050 of income $10,563 next $42,250 of income $3,360 next $22,400 of income $730 First $7,300 of income MATT PAYS TAX OF ? ON MATT?S ? Which Groups Pay the Most In Federal Taxes? 18 - 1 Federal taxes as a whole are progressive. 23.8 37.0 20.1 Highest 1% 100.0 100.0 100.0 Total 70.5 85.8 60.7 Highest 20% 18.1 13.8 18.8 Fourth 20% 8.4 4.4 11.4 Third 20% 2.6 ?1.8 6.7 Second 20% 0.3% ?2.3% 2.6% Lowest 20% PERCENTAGE OF TOTAL FEDERAL TAXES PAID (3) PERCENTAGE OF TOTAL FEDERAL INDIVIDUAL INCOME TAXES PAID (2) PERCENTAGE OF TOTAL INCOME EARNED (1) INCOME CATEGORY 32.7 23.8 Highest 1% 100 100.0 All income categories 26.1 15.6 Highest 20% 18.7 6.8 Fourth 20% 14.4 3.5 Third 20% 10.8 ?0.2 Second 20% 4.6% ?6.0% Lowest 20% ALL FEDERAL TAXES PAID AS A FRACTION OF INCOME (2) FEDERAL INCOME TAXES PAID AS A FRACTION OF INCOME (1) INCOME CATEGORY The Tax System Marginal and Average Income Tax Rates Marginal tax rate The fraction of each additional dollar of income that must be paid in taxes. Average tax rate Total tax paid divided by total income. The Corporate Income Tax The federal government taxes the profits earned by corporations under the corporate income tax. Economists debate the costs and benefits of a separate tax on corporate profits. The Tax System Evaluating Taxes The goal of economic efficiency The ability-to-pay principle The horizontal-equity principle The benefits-received principle The goal of attaining social objectives The Tax System Evaluating Taxes THE GOAL OF ECONOMIC EFFICIENCY 18 - 2 The Efficiency Loss from a Sales Tax The Tax System Should the United States Shift to a Consumption Tax? Excess burden The deadweight loss from a tax. 18 - 2 Would a consumption tax be more efficient than an income tax? Evaluating Taxes THE GOAL OF ECONOMIC EFFICIENCY The Tax System Other Goals or Principles for Evaluating Taxes THE ABILITY-TO-PAY PRINCIPLE THE HORIZONTAL-EQUITY PRINCIPLE THE BENEFITS RECEIVED PRINCIPLE ATTAINING SOCIAL OBJECTIVES Tax Incidence Revisited: The Effect of Price Elasticity on Who Actually Bears the Burden Of a Tax Tax incidence The actual division of the burden of a tax. LEARNING OBJECTIVE 2 18 - 3 The Effect of Elasticity on Tax Incidence Do Corporations Really Bear the Burden Of the Federal Corporate Income Tax? 18 - 3 Who really bears the burden of the taxes paid by Dell? Most economists agree that some of the burden of the corporate income tax is passed on to consumers in the form of higher prices. Remember not to Confuse Who Pays the Tax with Who Bears the Burden of the Tax The Effect of Price Elasticity on the Excess Burden of a Tax 18 - 1 LEARNING OBJECTIVE 2 The Distribution of Income LEARNING OBJECTIVE 3 Measuring the Distribution of Income and Poverty The Distribution of Household Income in the United States, 2003 18 ? 3 11.0 75,000-99,999 15.1 100,000 and over 18.0 50,000-74,999 15.0 35,000-49,999 11.9 25,000-34,999 13.1 15,000-24,999 15.9% 0 to $14,999 PERCENTAGE OF ALL HOUSEHOLDS ANNUAL INCOME The Distribution of Income Measuring the Distribution of Income and Poverty How Has the Distribution of Income Changed Over Time? 18 ? 4 51.7 45.0 44.0 43.3 43.7 46.6 49.8% HIGHEST 20% 22.3 24.1 24.7 24.5 24.9 24.0 23.4% FOURTH 20% 15.3 17.3 17.6 17.0 16.9 15.9 14.8% THIRD 20% 9.5 10.5 10.6 10.8 10.3 9.6 8.7% SECOND 20% 3.1 1950 4.1 1936 3.2 1960 4.1 1970 4.3 1980 3.9 1990 3.4% 2003 LOWEST 20% YEAR The Distribution of Income Measuring the Distribution of Income and Poverty THE POVERTY RATE IN THE UNITED STATES Poverty line A level of annual income equal to three times the amount necessary to purchase the minimal quantity of food required for adequate nutrition. Poverty rate The percentage of the population that is poor according to the federal government?s definition. The Distribution of Income Measuring the Distribution of Income and Poverty Poverty Rates Vary Across Groups, 2003 18 ? 5 8.2 White, not Hispanic 11.8 Asians 22.5 Hispanics 24.4 Blacks 28.0 Female head of family, no husband present (all races) 12.5% All people 18 - 4 Poverty in the United States, 1960-2003 The Distribution of Income Explaining Income Inequality For most people, the most important factor of production they own is their labor. Therefore, the income they earn will depend on how productive they are and on the prices of the goods and services their labor helps to produce. Many people own other factors of production, such as capital in the form of stock on corporations. Ownership of capital is not equally distributed. The tax system does not seem to have played a major role in recent changes in income inequality. Earning an income is also subject to good and bad fortune. The Distribution of Income Showing the Income Distribution with a Lorenz Curve Lorenz curve A curve showing the distribution of income by arraying incomes from lowest to highest on the horizontal axis and indicating the cumulative fraction of income earned by each fraction of households on the vertical axis. The Distribution of Income Showing the Income Distribution with a Lorenz Curve 18 - 5 The Lorenz Curves and Gini Coefficients The Distribution of Income INCOME MOBILITY IN THE UNITED STATES 18 - 6 Income Mobility in the United States, 1996-1999 18 - 2 Are Many Individuals Stuck in Poverty? LEARNING OBJECTIVE 3 The Distribution of Income Poverty and the Distribution of Income around the World Income Inequality around the World 18 ? 6 5.8 40.4 7.0 Canada 4.3 36.9 8.5 Germany 19.1 59.1 3.1 Mexico 3.4 35.7 10.6 Japan 3.9 37.2 9.6 Norway 5.6 40.2 7.2 France 6.1 43.3 7.1 Ireland 7.2 44.0 6.1 United Kingdom 8.2 50.0 6.1 Thailand 8.5 45.8 5.4 United States 18.8 62.2 3.3 Chile 32.0 70.3 2.2 Botswana 33.3 66.5% 2.0% South Africa RATIO HIGHEST 20% LOWEST 20% The Distribution of Income Poverty and the Distribution of Income around the World 18 - 7 Global Poverty Rates The Distribution of Income Poverty and the Distribution of Income around the World Poverty in Africa is Much Greater than Elsewhere in the World 18 ? 7 63.6 53.0 Africa 10.5 22.2 Latin America 18.7 74.4 China 13.5 49.4 Asia minus China 18.6% 41.0% World 1998 1970 REGION PERCENTAGE OF THE POPULATION IN POVERTY The Chancellor?s Attempts to Emulate Robin Hood Are Not Working Average tax rate Excess burden Lorenz curve Marginal tax rate Poverty line Poverty rate Progressive tax Regressive tax Tax incidence
Want to see the other 28 page(s) in hubbard01_instructorppt18.ppt?JOIN TODAY FOR FREE!