Government Intervention and Teaxes

GOVERNMENT INTERVENTION WHY WOULD THE GOVERNMENT WANT TO CONTROL PRICES? • Equity -An attempt to make things fair or equal. • Quality of life • A fair chance for everyone. SOCIAL GOALS VS. MARKET EFFICIENCY • People's economic goals often come into conflict with each other. The governmentserves a role of regulating the economy to provide equality and security. The government in effect distorts the Market to achieve social goals PRICE CEILINGS • The maximum legal price that can be charged for a product. • Lead to inefficiency: -Inefficient allocation to consumers -Wasted resources -Inefficiently low quality -Black markets PRICE FLOOR • The lowest legal price that can be paid for a good or service. • Minimum wage is a price floor. • Also lead to inefficiency -Inefficient allocation of sales among sellers -Wasted resources -Inefficiently high quality -Illegal Activity. THE EFFECTS OF TAXES • Tax incidence • Excise tax -specific taxes on specific goods or services • Excess Burden or "deadweight loss" -cost of the loss in efficiency due to taxhow do taxes cause inefficiently? TAXES • Tax revenues exceeded $3.3 Trillion last year • $11,800 average for each citizen • Government revenues have grown over 800% since 1940 even when adjusted forinflation. TAX EXAMPLES • Federal income tax (0-35%) Progressive tax, largest form of federal income. • Social Security tax (FICA; 6.2%) Second largest form of federal income • Medicare tax; (1.45% no cap)  • Corporate income tax (15 -39%) 2nd largest source of federal income • Excise Tax, 4th largest source of federal income. • Luxury Tax. Mostly paid on veblin--prices increase with demand. • Transfer Tax. Tax on an item that changes ownership. 2% of revenue -Gift tax, taxation on large goods or gifts. -Estate tax, taxation of a persons assets upon transfer upon their death. • State and local taxes -Property taxes -Permits -Fees EFFECTIVE TAXES • To be effective, they must be: -Equitable -Simple -Efficient TAXATION PRINCIPLES • Benefit principle • Ability to pay principle SYSTEMS OF TAX INCIDENCE • Proportional -Everyone pays the same percentage --flat  • Progressive -Pay more as you increase your income • Regressive -Higher rate of taxation the lower you income you make.