tailieunhanh - Lecture Public finance (10/e): Chapter 21 - Harvey S. Rosen, Ted Gayer

Chapter 21 - Fundamental tax reform: Taxes on consumption and wealth. In this chapter we will discuss: How a value-added tax works, efficiency and equity of personal consumption taxes, rationalizations for sales taxes, efficiency and distributional implications of states sales taxes,. | FUNDAMENTAL TAX REFORM: TAXES ON CONSUMPTION AND WEALTH Chapter 21 How a Value-Added Tax Works Producer Purchases Sales Value Added VAT at 20 Percent Rate Farmer $ 0 $400 $ 400 $ 80 Miller 400 700 300 60 Baker 700 950 250 50 Grocer 950 1,000 50 10 Total $2,050 $3,050 $1,000 $200 21- Efficiency and Equity of Personal Consumption Taxes Efficiency issues An income tax and saving and labor supply decisions A consumption tax and saving and labor supply decisions 21- Efficiency and Equity of Personal Consumption Taxes Equity issues Progressiveness Ability to pay Annual versus Lifetime Equity A numerical example A formal model 21- Annual versus Lifetime Equity – A Numerical Example Parameters Income tax rate = 50% Consumption tax rate = 50% Interest rate = 10% Mr. Grasshopper Ms. Ant Income tax Consumption tax Income tax Consumption tax Income period 0 $1,000 $1,000 $1,000 $1,000 Consumption period 0 $500 $500 $0 $0 Taxes period 0 $500 $500 $500 $0 Income | FUNDAMENTAL TAX REFORM: TAXES ON CONSUMPTION AND WEALTH Chapter 21 How a Value-Added Tax Works Producer Purchases Sales Value Added VAT at 20 Percent Rate Farmer $ 0 $400 $ 400 $ 80 Miller 400 700 300 60 Baker 700 950 250 50 Grocer 950 1,000 50 10 Total $2,050 $3,050 $1,000 $200 21- Efficiency and Equity of Personal Consumption Taxes Efficiency issues An income tax and saving and labor supply decisions A consumption tax and saving and labor supply decisions 21- Efficiency and Equity of Personal Consumption Taxes Equity issues Progressiveness Ability to pay Annual versus Lifetime Equity A numerical example A formal model 21- Annual versus Lifetime Equity – A Numerical Example Parameters Income tax rate = 50% Consumption tax rate = 50% Interest rate = 10% Mr. Grasshopper Ms. Ant Income tax Consumption tax Income tax Consumption tax Income period 0 $1,000 $1,000 $1,000 $1,000 Consumption period 0 $500 $500 $0 $0 Taxes period 0 $500 $500 $500 $0 Income period 1 $0 $0 $50 $100 Consumption period 1 $0 $0 $525 $550 Taxes period 1 $0 $0 $25 $550 Present Value of taxes paid $500 $500 $523 $500 21- Annual versus Lifetime Equity – A Formal Model Parameters Income tax rate = t Consumption tax rate = tc Interest rate = r Income Tax Mr. Grasshopper Ms. Ant Income period 0 I0 I0 Consumption period 0 c0G c0A Taxes period 0 tI0 tI0 Income period 1 r(I0 – c0G) r(I0 – c0A) Taxes period 1 tr(I0 – c0G) tr(I0 – c0A) 21- Annual versus Lifetime Equity – A Formal Model Parameters Income tax rate = t Consumption tax rate = tc Interest rate = r Consumption Tax Mr. Grasshopper Ms. Ant Present Value of Lifetime Income I0 = c0G + c1G/(1 + r) I0 = c0A + c1A/(1 + r) Present Value of Lifetime Tax Liability RcG = tcc0G + tcc1G/(1 + r) = tcI0 RcA = tcc0A + tcc1A/(1 + r) = tcI0 21- Retail Sales Tax General sales tax Percent of own-source revenue from sales taxes State: Local: Selective sales tax (excise tax or differential .

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