THE BEN EATS PRINCIPLE

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THE BEN EATS PRINCIPLE One principle of taxation, called the benefits principle, states that people should pay taxes based on the benefits they receive from government services. 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 […]

TAXES AND EQUITY

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TAXES AND EQUITY Ever since American colonists dumped imported ~ into Boston harbor to protest high British taxes, tax policy has generated some of the most heated debates in American politics. The heat is rarely fueled by questions of efficiency. Instead, it arises from disagreements over how the tax burden should be distributed. Senator Russell Long once mimicked […]

CASE STUDY

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CASE STUDY ICELAND’S NATURAL EXPERIMENT In the 19808, Iceland changed its tax system in a way that, as a side effect. provided a natural experiment to show how taxes affect an economy. Before the reform, people paid taxes based on their previous year’s income. After the reform, people paid taxes based on their current income. Thus, taxes […]

MARGINAL TAX RATES VERSUS AVERAGE TAX RATES

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MARGINAL TAX RATES VERSUS AVERAGE TAX RATES When discussing the efficiency and equity of income taxes, economists distinguish between two notions of the tax rate: the average and the marginal, The average tax rate is total taxes paid divided by total income. The marginal tax rate is the extra t? on an additional dollar of income. For […]

CASE STUDY

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CASE STUDY SHOULD INCOME OR CONSUMPTION BE TAXED? When taxes induce people to change their behavior-such as inducing Jane to buy less pizza-the taxes cause deadweight losses and make the allocation of resources less efficient. As we have already seen, much government revenue comes from the individual income tax. In a case study in Chapter 8, we […]

DEADWEIGHT LOSSES

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DEADWEIGHT LOSSES One of the Ten Principles of Economics is that people respond to incentives, and this includes incentives provided by the tax system. If the government taxes ice cream, people eat cream and more frozen yogurt. If the government taxes housing, people live in smaller houses and spend. Now suppose that the government levies a $2 […]