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The corporate income tax provides a good example of the importance of tax incidence for tax policy. The corporate tax is popular among voters. After all corporations are not people. Voters are always eager to have their taxes reduced and have some impersonal corporation pick up the tap.  But before deciding that the corporate income tax is a good way for the government to raise revenue we should consider who bears the burden of the corporate tax. This is difficult question on which economists disagree but one thing is certain people pay all taxes. When the government levies a tax on a corporation the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people the owners customers or workers of the corporation.  Many economists believe that workers and customers bear much of the burden of the corporate income tax. To see why consider an example. Suppose that the U.S government decides to...

Much debate over tax policy concerns whether the wealthy pay their fair share. There is no objective way to make this judgment. In evaluating the issue for yourself however it is useful to know how much families with different incomes pay under the current tax system.  Table 8 presents some data on how all federal taxes are distributed among income classes. To construct this table families are ranked according to their income and placed into five groups of equal size called quintiles. The table also presents data on the richest one percent of Americans. Studies that include both taxes and transfer show more progressivity. The richest group of families still pays about one quarter of its income to the government even after transfer are subtracted. By contrast poor   families typically receive more in transfer than they pay in taxes. The average tax rate of the poorest quintile rather than being 5.5 percent as in the table is approximat...

One principle of taxation called the benefits principle states that people should pay taxes based on the benefits they receive from government service. This principle tries to make public goods similar to private goods. It seems fair that a person who often goes to the movies pays more in total for movie tickets than a person who rarely goes. Similarly a person who gets great benefits from a public good should pay more for it than a person who gets little benefit. The gasoline tax for instance is sometimes justified using the benefits principle. In some states revenues form the gasoline tax are used to build and maintain roads. Because those who buy gasoline are the same people who use the roads the gasoline tax might be viewed as a fair way to pay for this government service.  The benefit principle can also be used to argue that wealthy citizens should pay higher taxes than poorer ones. Simply because the wealthy benefit more from public servic...

If you ask the typical person on April 15 for an opinion about the tax system you might hear about the headache of filling out tax forms. The administrative burden of any tax system is part of the inefficiency it creates. This burden includes not only the time spent in early April filling out forms but also the time spent throughout the year keeping records for tax purposes and the resources the government has to use to enforce the tax laws.  Many taxpayers especially those in higher tax brackets hire tax lawyers and accountants to help them with their taxes. These experts in the complex tax laws fill out the tax forms for their clients and help clients arrange their affairs in a way that reduces the amount of taxes owed. This behavior is legal tax avoidance which is different from illegal tax evasion.  Critics of our tax system say that these advisers help their clients avoid taxes by abusing some of the detailed provisions of the tax...

If the government taxes ice cream people eat less ice cream and more frozen yogurt. If the government taxes housing people live in smaller houses and spend more of their income on other things. If the   government taxes labor earnings people work less and enjoy more leisure. Because taxes distort incentives they entail deadweight losses. As we first discussed in the deadweight loss of a tax is the reduction in economic well-being of taxpayers in excess of the amount of revenue raised by the government. The deadweight loss is the inefficiency that a tax creates as people allocate resources according to the tax incentive rather the true costs and benefits of the goods and service that they buy and sell. To recall how taxes cause deadweight losses consider an example. Suppose that Joe places an S8 value on a pizza and Jane places a S6 value on it. If there is no tax on pizza the price of pizza will reflect the cost of making it. Let’s suppose th...