CHAPTER

12
Taxes on Economic
Transactions
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe

Excise Taxes, Unit Taxes, Ad

Valorem Taxes
Excise

tax

Placed

Unit

on sale of specific good/service

tax

Certain

Ad

amount per unit of good sold

valorem tax

Fixed

percentage of value of taxed goods

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Unit Taxes Versus Ad Valorem

Taxes

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Unit Taxes Versus Ad Valorem

Taxes

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Unit Taxes versus Ad Valorem

Taxes
Fluctuation
Amount

in price of good

per unit from unit tax unchanged

Amount

per unit from ad valorem tax

fluctuates

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Unit Taxes and Ad Valorem

Taxes

Advantages of unit taxes

Amount of tax not affected by price of good

Disadvantages
Favor expensive units
Inflation can have adverse effect on real tax

Advantages of ad valorem taxes

Unaffected in real terms by inflation

Disadvantages

Less appropriate when value of a good cannot be

easily determined

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Revenues from Excise Taxes

Small

source of government revenue

Closely related to user charges at federal
level

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

User Charges and Efficiency

Minimize

excess burden of taxation

Acts as price for public sector output
Acts as rationing device
May be desirable even when marginal
cost is zero

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

User Charges and Demand

Revelation
Allow

producers to gauge consumer

demand

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

User Charges and Equity

Satisfy

benefit principle of taxation

Disadvantages: redistributional programs
Difficult

to determine who benefits and how

benefits are shared
Costly to charge user fees because of nonexcludability

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Approximating User Charges

in the Real World
User

charges may be difficult to

approximate
User Charges as Taxes
Similar

to market prices
Are among most effective and fair methods
of taxation when feasible

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

User Charges and Public

Enterprise
Output

can be provided more efficiently

when user fees employed as method of
taxation
Revenues and User Fees
Makes

up substantial amount of state and

local government revenues

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Import and Export Taxes

Import

duty (tariff) tax levied on

imported goods
Easy transactions to monitor and collect
Important source of revenue for less
developed countries

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Import Taxes and Trade

Restrictions
Used

in developed countries to
discourage imports
Trade barriers politically produced
protection for domestic industries
Reduction of trade barriers would
increase value of total world output

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Quotas
Law

restricting quantity of good that can

be imported
No tax is collected
Less beneficial than a tariff to public
More beneficial to interest groups

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Effects of Quotas and Tariffs

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Trade Agreements
Established

to keep trade barriers low

Countries agree not to subsidize
exporting industries
GATT, WTO, EU, NAFTA

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

General Sales Taxes

Ad

Valorem tax on all retail sales

Effects similar to an excise tax
Restricts

level of output
Raises prices
Approximates

consumption

tax on taxpayers level of

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Is the Sales Tax Regressive?

Often

viewed as regressive with respect

to income
Should consider income over life cycle
Sales Taxes and the Internet
Cannot

tax internet access

Fear that internet will lead to decline in
state sales tax revenues
Streamlined Sales Tax Project
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe

Income and Substitution

Effects
Substitution

effect

Increased

relative price causes substitution

from one good to another

Income
Effect

effect
of lowering an individuals income

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Possible Effects of a
Consumption Tax

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Turnover Taxes
Paid

as fixed percentage of value of

transaction
Taxes all transactions
Inefficient, discourages transactions
Encourages vertical integration

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Value Added Tax (VAT)

Tax

on value added by each producer in

economy

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

VAT versus Sales Tax

VAT
Levied

on suppliers
No need to distinguish between retail and
wholesale purchasers
Sales

tax

Levied

on demanders
Easier to collect
Easier to calculate
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe

Value Added Tax in European

Union
European

Community nations use a VAT as

major source of revenue
Taxes on goods and services are heavier
than in the U.S.

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Visibility of the Tax

More

difficult to evade a VAT

Taxpayers may be less resistant to paying
the tax
May be politically more popular than a
sales tax because its effects are more
likely to be misunderstood

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe