The equity. Implications of taxation. Tax incidence. (Lecture 11-19) презентация

The Three Rules of Tax Incidence
The Statutory Burden of a Tax Does Not Describe Who Really Bears the Tax
The Side of the Market on Which the Tax Is Imposed Is Irrelevant to the Distribution of the Tax Burdens
Parties with Inelastic Supply or Demand Bear Taxes;
Parties with Elastic Supply or Demand Avoid Them
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The Statutory Burden of a Tax Does Not Describe Who Really Bears the Tax
statutory incidence: The burden of a tax borne by the party that sends tax payment to the tax office.
economic incidence: The burden of taxation measured by the change in the resources available to any economic agent as a result of taxation.
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Consumer and producer tax burden
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Discription of panels (a) &(b)
On the left side (a) there is a pre-tax situation: equilibrium of supply and demand at the price $1.5 and quantity 100; (the coordinates of the point A :$1.5;100) .
On the right side (b) there is tax imposed $0.5per unit (the statutory burden); supply curve shifts to the left from S1 to S2 and equilibrium point, intersection of demand curve D and a new supply curve S2 , shifts from A to D; the coordinates of the point A changes to ($1.8;90) at the point D.
The economic tax burden: $0.2 is borne by producers and $0.3 is borne by consumers.
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Burden of the Tax on Consumers and Producers
tax wedge: The difference between what consumers pay and what producers receive (net of tax) from a transaction; or
The difference between what employers are charged and employees receive (net of tax) from a transaction;
E.g.: price of gas for producer and consumer due to excise tax, production tax and VAT ; cost of wages for employers and employees wage due to social security charges and PIT
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II.The Side of the Market on Which the Tax Is Imposed Is Irrelevant to the Distribution of the Tax Burdens
Tax insidence is identical whether the tax is levied on producers or consumers.
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Parties with Inelastic Demand Bear Taxes;
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Parties with Inelastic Demand Bear Taxes
Perfectly inelastic demand /demand curve D vertical/ ; increase of price due to tax $0,5 per unit; shift of the supply curve to the right;
Price increases from $1.5 to $2.0;
Perfectly inelastic demand means that consumers bear the full tax.
When demand is perfectly inelastic producers bear none of the tax and consumers bear all of the tax: the full shifting of the tax.
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Parties with Elastic Demand Avoid Taxes
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Parties with Perfectly Elastic Demand Avoid Taxes
The full burden of tax bears producer because of inelastic supply.
Consumers avoid tax because of elastic demand.
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Supply Elasticities
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Supply Elasticity
There is two supply cases. On the left side (a) inelastic supply, curve S almost vertical.
On the right side (b) elastic supply, curve S almost horizontal.
On both services(commodities) the same tax is levied;
Shift of the supply curve is the greater the higher is elasticity of supply.
Reaction of demand due to tax increase /=increase of price/ on panel (a) is minor on panel (b) very strong.
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Parties with Inelastic Supply Bear Taxes;
Inelastic supply/demand/ party of the transaction bears tax increase.
Absorption of the tax increase is inversely proportional to the elasticity of supply/demand/, the higher elasticity of supply/demand/ the lower absorption of tax increase, and reverse.
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Recap:
The statutory burden of a tax does not describe who really bears the tax.
The side of the market on which the tax is imposed is irrelevant to the distribution of tax burdens.
Parties with inelastic supply or demand bear taxes; parties with elastic supply or demand avoid them.
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Tax Inefficiencies and Optimal Taxation
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Optimal income and commodity taxation
1 Optimal Income Taxes
2 Optimal Commodity Taxation
3 Conclusions
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Max-min rule as a standard of rational behavior
Rationale behavior : max and min rules
A.Maximize results out of the given resources: max rule or
B.Minimize the costs of the predetermined goal:min rule
In the case of taxation we should apply „min”rule
We should know how much revenue to collect in order to finance projects/ bridges, roads, hospitals, schools etc. etc./
Taxation provides revenues for budget expenditure
At the same time we know that :every tax is inefficient: distorts the behavior of producers and consumers/ creates a deadweight loss/
So, taxation should minimize the loss of consumers and producers surplus achieving predetermined level of tax revenues
The levels of harmfulness of specific taxes are different; there is a room for optimization of tax structure
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Economic function of taxes
Which factor of the GDP creation a given tax charges? /implicit tax rates=total tax to tax base/
labor /social security charges and personal income tax /PIT/
consumption/VAT, sales tax, production tax, exise taxes /
capital/dividend taxation, interest taxation ( no tax costs)/
green taxes /GDP demolition due to externalities/
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Type of taxes
Direct taxes / on income; PIT, CIT/
Indirect taxes / indirect taxes of income; VAT excise taxes/
Social security charges /taxes on labor costs/
Green taxes/diminishing natural resources use/
Taxes on financial transactions/ The European Commission idea to have own resources of the EU budget / 3/4 to budget of the UE ¼ to national budget/
Tax shifting / forward and backward/ : who finally pay for it/charged as a result od green taxes and financial transaction taxes?
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Optimal taxation of income
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The importance of the PIT revenues in the EU/% of total tax revenues/
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Taxation of income in the UE
There is no common acceptable rule of taxing income in the UE 28 countries
SK, BG, RO effective tax rate on income 10%; DK effective tax rate on income 50% /as a pp of the total taxation/
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Flat tax in the EU
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Flat tax rate in the EU
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Other countries with a flat tax
Russia 13%; Serbia-14%; Kirgistan-10%; Georgia-12%; Ukraina-13% ;
according to the IMF:
“the empirical evidence on flat taxes effects is very limited" ;
"there is no sign of Laffer-type behavioral responses." / increase of tax revenues due to decrease of effective tax rate/
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Laffer curve
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The interpretation of Laffer curve
If the effective tax rate on income is not to high, tax revenues increases but pace of increase is diminishing ; (correct side);
higher effective tax rates on the wrong side decrease the volume of tax revenues
Optimal level of the effective tax rate is unknown/ max of revenues is unknown/
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"there is no sign of Laffer-type behavioral responses."
Interpretation:
If a flat tax have a Laffer-type behavior than decrease of effective tax rate on a wrong side would increase tax revenues; there is no evidence of such behavior of taxpayers
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Flat tax rate
Flat tax rates on income are not in accordance with optimal taxation of income
Flat tax rates of personal income are not in accordance with fairness of taxation
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CZ/ effective flat tax rate/
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effective flat tax rate
effective flat tax rate with no general allowance means that nominal and effective tax rates are the same for all taxable income brackets; flat tax is not a fair taxation of income
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Flat income tax
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Flat income tax
At the flat tax rate effective taxation rate is the same for all income brackets;
Low income groups have a large loss of utility
High income groups have a smaller loss of utility
Flat tax system is unfair
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Effective tax rate/ETR/
taxes paid/income
F.e.:
income= 60 000
nominal tax rates:
0-5000= 0%=tax=0
5001-10 000= 10%=tax=(10000-5001)*0,1=tax=499,9
10 001-20 000= 20%=(20000-10001)*0,2=tax=1999,8
20 001-40 000= 30%=(40000-20001)*0,3=tax= 5999,7
40 001-70 000= 35%=tax=(60000-40001)*0,35=tax=6999,65
Sum of taxies=0+499,9+1999,8+5999,7+6999,65= 15499,05
Effective tax rate /ETR/=15499,05/60000=0,2583= 25,83%
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Progressive income tax
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Progressive income tax
In the case of progressive income tax marginal tax rates increase with the increase of taxable income
Effective increase of taxation depends on the value of the income brackets and the value of marginal rate
The more brackets the greater level of taxation fairness ; the loss of utility the same for all income brackets
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Efficiency of public sector
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Efficiency of public sector use of tax revenues
What is an appropriate level of effective taxation?
The higher the efficiency of the use of tax revenues the higher acceptable effective taxation in every taxable income bracket /tax burden/.
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Structure of PIT in the EU
.
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PIT in the EU countries
PIT in the EU28 is extremely diversified:
Different levels of the general allowance
Different numbers of taxable income brackets
different marginal tax rates
Different effective taxation for a given total income
Different personal allowances/ because of age of the taxpayer , number of children in the family , disability etc. etc./
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Effective tax rate due to general allowance
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The importance od sizable general allowance
General allowance could change an effective tax rate considerably:
Example: general allowance 19500 €/CY/
First bracket above general allowance level 19500 up to 400000€ ,marginal rate 20%
Effective rate for the yearly taxable income 35000€ / total income 45000€/:
=(35000-19500)*0,2=3100€
Effective tax rate =3100/45000=6,9%
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LU income tax structure
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Taxation of income in increasing brackets/1908€/ in LU
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LU taxation of income
LU taxation of income is a perfect fit to optimal taxation of income
The slower loss of utility of income of the higher income groups/ higher brackets / is matched by increase of marginal nominal rate 2pp for every 1908€ increase of taxable income
Very similar taxation of the personal income there is in the us, Japan. China, Germany, France, Great Britain, Italy, Spain, Portugal, Greece.
Only less developed countries have a taxation schemes flat type.
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Effective taxation of income in PL and LU /comparison/
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Effective taxation of income in PL and LU /comparison/
As we see nominal marginal rates matters very much;
because of the very low marginal rates in the low income brackets , effective taxation of income in the LU is considerable lower than in Poland at least to taxable income 21000€, more than 95% of taxpayers in Poland.
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Effective taxation of income on the level of PPS per capita
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Taxation of the PPS per capita income
There is a deep differentiation of taxation of the per capita income/PPS/ from 3,6% in CY to 33,6% in DK.
Level of PPS per capita for 7 countries : AT, SE, DK, UK, DE, FI i BE is comparable: bracket 31000-29000 PPS per capita but taxation differs very much : from 14,5% in DE to 33,6% in DK.
PPS per capita in the USA =38700PPS in Poland= 14400PPS. Effective taxation in US and Poland is the same:17,1%.
In the US there is a strong tax preference for low income groups in Poland such a preference does not exists.
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Taxation of the min wages
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Effective taxation of average wages
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Effective income tax rates in CH, JP and USA
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Structure of nominal rates in the USA/income in€/
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Structure of nominal rates in JP/income in €/
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Structure of nominal rates in CH /income in€/
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Optimal taxation of goods and services
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Ramsey Taxation: The Theory of Optimal Commodity Taxation
Ramsey Rule: To minimize the deadweight loss of a tax system while raising a fixed amount of revenue, taxes should be set across commodities so that the ratio of the marginal deadweight loss to marginal revenue raised is equal across commodities.
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The marginal deadweight loss to marginal revenue raised not equal across commodities.
MDWL1/MR1> MDWL2/MR2> MDWL3/MR3>
MDWL4/MR4>…… MDWLn/MRn
When relation of the deadweight loss due to taxation would be different than decreasing taxation of n-th good or service , decreasing of taxation of n-1 good or service and increase of the tax rate on good number 1 , good number two and so forth would reduce the deadweight loss, reduction of the deadweight loss / due to reduced tax rates /would be grater than increase of deadweight loss due to increased tax rates./
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Inverse Elasticity Rule
If we assume that the supply side of commodity markets is perfectly competitive (elasticity of supply is infinite), then the Ramsey rule implies that:
That means: tax rate on good or service should be set inversely to its elasticity of demand ηi;
The higher ηi the lower tax; the lower ηi the higher tax.
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Optimal commodity taxes
The elasticity rule: When elasticity of demand for a good is high, it should be taxed at a low rate;
when elasticity is low, the tax rate should be high.
The broad base rule: It is better to tax a wide variety of goods at a moderate rate than to tax very few goods at a high rate.
Because the marginal deadweight loss from a tax rises with the tax rate, the government should spread taxes across a large number of commodities and not tax any one commodity at a very high rate.
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Equity Implications of the Ramsey Rule
The elasticity of demand for luxury goods is much higher than that for basic consumption goods, so the inverse elasticity rule would suggest that the government tax basic consumption goods much more highly than luxury goods.
This would mean imposing a tax on a good consumed exclusively by higher-income groups that was much lower than the tax imposed on a good consumed by all.
This outcome, while efficient, might violate a government’s sense of tax fairness across income groups (vertical equity) and requires a trade off beetwen fairness and efficiency of commodity and service taxation .
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The loss of utility due to taxation of commodity
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The loss of utility due to taxation
When a tax $0,5 is imposed the supply curve shifts from S1 to S2 and a deadweight loss ABC occurs / for Q1-Q2 social marginal benefits are lower than social marginal costs /
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Deadweight loss due to taxation is a function of the elasticity of demand
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Deadweight loss due to taxation is a function of the elasticity of demand
The same tax is imposed on a commodity with elastic and inelastic demand; the shift od supply curve is the same ;
The deadweight loss increases with the increase of the elasticity of demand
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The nature of the deadweight loss
The inefficiency of any tax is determined by the extent to which consumers and producers change their behavior to avoid the tax; deadweight loss is caused by individuals and firms making inefficient consumption and production choices in order to avoid taxation.
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The level of tax and the deadweight loss
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The level of tax and the deadweight loss
The deadweight loss increases more than proportional to increase of tax rate.
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Conclusion
The fundamental issue in designing tax policy is the equity-efficiency trade-off.
two key principles:
1.the more elastically supplied or demanded the good, the larger the deadweight loss from the tax.
2.the higher the tax rate, the larger the incremental deadweight loss of taxation.
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The EU VAT concept and the Ramsey rule
The EU concept of VAT:
One standard rate /not lower than 15% for all goods and services/
Reduced or super reduced rate are only for a determined time, limited and conditional
Ramsey rule indicated that commodity and services taxation should be proportional/ inversely/ to price elasticity of demand.
So, The EU concept of VAT is wrong; it assumes that elasticity of demand for all good and services is the same and that is a wrong assumption; elasticity are different so VAT rates should be diversified to minimize loss of total surplus; standard rate for every good and service would no minimize deadweight loss.
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