partly due to the administrative burden out on the taxpayer. The most efficient tax would be a lump-sum tax, which is a fixed amount of money to be paid by every
taxpayer despite level of income. This is not fair in many people’s eyes. Zone principle of equity is the benefits principle; which states that people should pay as much tax, as they would receive in benefits for. Others believe in the ability-to –pay principle, that people should be taxed only an amount which does not damage their wellbeing. How to balance equity and efficiency is a constant debate.
12.1. The Financial Overview of the US Government
The US federal government collects its tax revenue through mainly income and payroll taxes, while states do that through sales and property taxes.
Every country has a government, which gets revenue to fund various activities. Of course vast majority of this revenue comes from taxes that is no surprise. Tax policies around the world differ greatly, but this overview of the US model gives a good example in general. Most of the tax revenue comes from individual income taxes, the US has relatively low taxes on income, and however, it is in the middle, so there are countries with even lower burdens. Europe by contrast tends to have much larger tax rates. Not everybody’s income is taxed the same. There is a minimum, which is not taxable and then there is the marginal tax rate that represents the taxable amount of each addition dollar earned. So even a very rich person will pay a small tax on his first 10 000 dollars and then each additional dollar will be taxed at a higher percentage. Companies are also taxed; they have to pay, among others, corporate taxes, where the firms profit is taxed and payroll taxes, where workers’ wages are taxed. The revenue from payroll taxes goes to social security programs like Medicare. Of course company owners after paying corporate taxes on company profits have to pay their own income taxes.
Of course there is the other side to this, which is spending. The US government spends on many things like public goods. The largest amount always goes to social security and next comes national defence. There are many debates constantly going on about which of these and by how much should be cut. Also the government always has to make interest payments on its debt, this can be from a very small to a very large amount, depending on the amount of debt incurred.
Around 40% of all taxes an American has to pay are paid to the states, which also have spending plans. They of course differ from federal spending and taxes. Sates collect types of taxes such as the sales tax and property taxes. They spend on social security as well among other things like education and infrastructure.
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12.2. Taxes and Efficiency
Taxes cause deadweight loss by distorting incentives and by creating an
administrative burden, both of which have to be minimized to achieve efficiency.
In order to create an efficient tax system a government must pay attention to two areas: minimizing deadweight loos and minimizing administrative burden. Deadweight loss in economics arises when incentives are artificially changed and the free market cannot allocate resources efficiently. In the case of taxes not only will they increase the price of a good and the person who will pay that price will lose some surplus, there will also be people who will no longer buy a certain good after it is taxed, these people will be the main contributors to the deadweight loss, since they will lose all of their surplus.
The tax revenue that the government gets is not deadweight loss and still is a kind of surplus since the assumptions that it will be given back to society equally through various services. Often the tax revenue that the government receives is less than the deadweight loss in the market and their difference is the total deadweight loss that the government should minimize.
Not only do taxes increase prices and distort the markets in that way, they are also a pain to process. Tax codes are almost always very complex and people have to spend time filling out various forms and saving traces of various
12.3. Taxes and Equity
What taxes are fair depends on one’s political philosophy, which differs from person to person and is not in the scope of the science of economics.
Taxes are a difficult subject in politics, because they not only have to be efficient, but also fair or equitable. This depends one one’s personal philosophy, which varies among individuals. There are some principles to consider. Some believe in the benefits
principle, which means that one should only pay in taxes as much as he receives in benefits. This is not completely possible, but, for example, a gas tax is going to be paid by a person who drives a car on the countries roads, therefore the revenue from that tax could be used to fix road infrastructure. However, some need more than they can afford, which leads us to the ability-to-pay principle, which states that people should
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much more in real terms. Lastly we could argue for a progressive tax, where the rich pay a larger proportion of income. The second concept is that of horizontal equity, where people of similar means pay a similar amount. This again is difficult to measure because the needs of individuals and families differ so much. For examples a young person who earns a certain amount and another one who earns the same, may have different needs because they either have health problems, have to take care of their aging parents or families. Tax Incidence is a term that describes who bears the tax burden and it is not always clear. For example a tax on one luxury good seems vertically equitable, but it may be that the demand for that good will go down and workers who make it will suffer loss of wages and jobs.