Lecture9:Taxation,EfficiencyandEquity

PublicFinance,SchoolofFinance,RUC 1

Taxrateandtaxrevenue––Thecaseofduty

onalcoholicbeverages

TheFinancialSecretaryannouncedanimmediatecutinthedutyrateonwinefrom80%to40%on28thFebruary2007.Inspiteofthis,themonthlywinetaxrevenueroseby24%,from

$21millioninFebruaryto$26millioninMarch.Canyouexplainwhy?

Thisisbecausethetaxcutloweredthewinepriceandthiscausedasubstantialincreaseinthevolumeofwineconsumption.Theimportvolumeofwineincreasedby73.3%,from0.75millionlitresinFebruaryto1.3millionlitresinMarch.

2

TAXATIONANDINCOMEDISTRIBUTION

OutlineoftheConcepts

StatutoryIncidence:法定歸宿

EconomicIncidence：經(jīng)濟歸宿

TaxShifting：稅收轉(zhuǎn)嫁

PartialEquilibriumModels：局部均衡模型

GeneralEquilibriumModels:一般均衡模型

LumpSumTax:一次性總賦稅

Proportional/Progressive/Regressive:比例/累進/累退

UnitTax:從量稅

TaxWedge:稅收楔子

AdValoremTax:從價稅

TaxIncidence:GeneralRemarks

Onlypeoplecanbeartaxes

Functionaldistributionofincome

Sizedistributionofincome

Otherclassificationschemes:region,race,sex,ageetc.

Bothsourcesandusesofincomeshouldbeconsidered

Incidencedependsonhowpricesaredetermined

Incidencedependsonthedispositionoftaxrevenues

Balanced‐budgettaxincidence

Differentialtaxincidence

Lump‐sumtax

Absolutetaxincidence

Principlesoftaxation

AdamSmith,theFatherofEconomics,suggestedfourprinciplesoftaxation.Theyareequity,certainty,convenienceandeconomy.

Principlesoftaxation

Equityprinciple

Thegovernmentshouldtaxitspeopleaccordingtotheirabilitiestopay,whichcanbemeasuredbytheirincomeandwealth.

Thisiscalledtheequityorability‐to‐payprinciple.

Principlesoftaxation

Equityprinciple

Toachievethis,Smithproposedtheimpositionofaproportionaltax.

However,toachieveequity,mostgovernmentsuseaproportionalorprogressivetax.

Forexample,inHongKong,thetaxratesofthesalariestaxincreasewithtaxpayers’taxableincome.

A.Principlesoftaxation

Equityprinciple

Fig.6.2Accordingtotheequityprinciple,whoshouldpaymoretax?

Therichmanshouldpaymoretaxthanthepoorwoman.

Principlesoftaxation

Certaintyprinciple

Taxpayersshouldbecertainaboutthetaxestobepaid,includingtheamount,thetimingandthemethodoftaxpayment.

Forexample,inHongKong,theamount,theduedateandthemethodoftaxpaymentareclearlydescribedintheNoticeofAssessmentandDemandforSalariesTax.

Principlesoftaxation

Convenienceprinciple

Thetimingandthemethodofpaymentshouldbeconvenientfortaxpayers,i.e.,nottoimposeextracostsonthem.

Forexample,inHongKong,salariestaxescanbepaidintwoinstalmentsseparatedbyaquarterofayear.Moreover,taxpayerscanpaybypost,byphone,byautomatedtellermachines,throughtheInternetorinperson.

Principlesoftaxation

Economyprinciple

Thecostsincurredintaxcollectionandtaxpaymentshouldbeminimised.Theadministrativecostsforthegovernmentandunnecessaryexpensesfortaxpayersshouldbereduced.

Forexample,employersinHongKongarerequiredtoinformthegovernmentaboutthesalariesandpensionsoftheiremployees.Thisreducesthegovernment’scostincollectinginformationandpreventingtaxevasion.

ClassificationofTaxation

Accordingtohowtaxrateschangewithtaxpayers’incomes

Accordingtowhethertaxburdencanbeshifted

Progressivetax Proportional

tax

Regressivetax Directtax

Indirecttax

TaxProgressivenessCanBeMeasuredinSeveralWays

TaxLiabilitiesunderahypotheticaltaxsystem

Income

TaxLiability

AverageTaxRate

MarginalTaxRate

$2,000

-$200

-0.10

0.2

3,000

0

0

0.2

5,000

400

0.08

0.2

10,000

1,400

0.14

0.2

30,000

5,400

0.18

0.2

Averagetaxrateversusmarginaltaxrate

Proportionaltaxsystem

Progressivetaxsystem

Regressivetaxsystem

Averagetax

rate

Totaltaxpayment

Income(eithertaxableincomeortotalincome)

Marginaltax

rate

Additionaltaxpayment

Additionalincome

MeasuringHowProgressiveaTaxSystemis–A

NumericalExample

v

-

T1 T0

I1I II0

T1 T0T0

v

I I

1 0

1 0 I0

300 200 300200

.00025 1000 800

1000 800

2.0 200

1000800

800

2.0

360 240 360240

.0003 1000 800

1000 800

240

1000800

800

$

2.60

PartialEquilibriumModels

BeforeTax After

Tax

2.40

2.20

ConsumersPaySuppliersReceive

$1.20

$1.20

S1

$1.40

$1.00

S0

2.00

1.80

1.60

1.40

1.20

1.00

0.80

0.60

0

1

2

Publ3icFinance,Schoo4lofFinance,RUC5

6

D0

D

7Qua1n7tity8

1

$

2.6

2.4

2.2

2

1.8

1.6

1.4

1.2

1

0.8

SX

S

PerfectlyInelastic

Supply DX

$

2.6

2.4

2.2

2

S

1.8

1.6

Perfectly

1.4 Elastic

Supply SX

1.2

1

0.8

DX’

D

X

AdValoremTaxes

DfDf’

PriceperPoundoffood

Sf

Pr

P0

Pm

QrPublicFinance,SchoolQof0Finance,RUC Qm Poundsoffood20

peryear

TAXATIONANDEFFICIENCY

OutlineofConcepts

ExcessBurden:超額負擔

EquivalentVariation:等價變換

IncomeEffect:收入效應(yīng)

SubstitutionEffect:替代效應(yīng)

CompensatedDemandCurve:補償需求曲線

SecondBest:次優(yōu)

ExcessBurdenDefined

Poundsofcornperyear

A

Ca

Cb

E1

C1

i

F D

B0 B1Poundsofbarleyperyear

EffectofTaxonConsumptionBundle

Poundsofcornperyear

A

G

Ca

Cb E2

C1

E1

i

ii D

B0 B1

Poundsofbarleyperyear

PublicFinance,SchoolofFinance,RUC

24

ExcessBurdenoftheBarleyTax

Poundsofcornperyear

A

Tax

Ca

Revenues

M

Cb E2

C1

Equivalentvariation

E1

i

F I ii D

B0 B3 B1

Poundsofbarleyperyear

PublicFinance,SchoolofFinance,RUC 25

QuestionsandAnswers

Iflumpsumtaxesaresoefficient,whyaren’ttheywidelyused?

Arethereanyresultsfromwelfareeconomicsthatwouldhelpusunderstandwhyexcessburdensarise?

MRS (1tb)Pbbc P

Pc

MRTbc b

Pc

QuestionsandAnswers

Doesanincometaxentailanexcessburden?

MRSlb MRTlb

MRSlc

MRSbc

MRTlc

MRTbc

QuestionsandAnswers

Poundsofcornperyear

Ifthedemandforacommoditydoesnotchangewhenitistaxed,doesthismeanthatthereisnoexcessburden?

A

Uncompensatedresponse

C E1 ?Incomeeffect

a i

J

R

Cb E2

Substitutioneffect-compensatedeffect

Compensateddemandcurve

C

S

1

B1=B2

F K iiB3

D

Poundsofbarleyperyear

ExcessBurdenMeasurementwithDemandCurves

Priceperpoundofbarley

a Excessburden=?????

????

Taxrevenues

(1+tb)Pbg f

Excessburdenoftax

S’b

h

d i

Pb Sb

q2 q1

Db

Poundsofbarleyperyear

AppendixA–FormulaforExcessBurden

A=?*base*height

=?*(di)*(fd)

fd=?Pb=(1+tb)*Pb–Pb=tb*Pbdi=?q

η=(?q/?Pb)(Pb/q)

?q=η(q/Pb)?Pb

since?Pb=tb*Pb

?q=η(q/Pb)*(tbPb)=η*q*tbsincedi=?q

A=?(di)(fd)

=?(ηqtb)*(tbPb)

=?*η*Pb*q*(tb)2

PreexistingDistortions

TheoryoftheSecondBest

Double‐dividendhypothesis

Pricepergallon

ofgin

Pricepergallon

ofrum

AppendixB–MultipleTaxesandtheTheoryoftheSecondBest

(1+tg)Pg (1+tr)Pr

Pr

Pg

Dr’

g2 g1 r3 r2 r1

Gallonsofginperyear Gallonsofrumperyear

EFFICIENTANDEQUITABLETAXATION

OptimalCommodityTaxation

w(T–l)=PXX+PYYwT=PXX+PYY+wl

wT=(1+t)PXX+(1+t)PYY+(1+t)wl

1 wT=PXX+PYY+wl

1+t

TheRamseyRule

marginalexcessburden=areafbae

=1/2?x[uX+(uX+1)]

=?X

Marginal

ExcessBurden

g

i

b

Exces