Microeconomics Mankiw Chapter 12 Notes

The US Federal government collects about 2/3 of the taxes in our economy
Receipts (federal taxes)
1. Largest source of revenue individual income tax
2. Payroll taxes tax on the wages a firm pays its workers
3. Corporate income tax
4. Excise taxes
Spending
1. Social Security transfer payments to the elderly
2. National defense
3. Income security welfare, Food Stamps, unemployment compensation
4. Medicare
5. Health (Medicaid, medical research)
Receipts > Spending = budget surplus; Spending > Receipts = budget deficit
State and Local Governments collect about 40% of all taxes paid
Receipts
1. Sales taxes
2. Property taxes
3. Individual and corporate income taxes (not all states tax)
4. Also receive substantial funds from the federal govt
Redistributes funds from high-income states to lower income states
5. Other hunting/fishing license fees, tolls, fares
Spending
1. Education
2. Public welfare (transfer payments to poor)
3. Highways
4. Other services
An efficient tax system imposes small deadweight losses and small administrative burdens (raises same
amount of revenue at smaller cost to taxpayers)
Deadweight loss inefficiency created by taxes as people allocate resources according to tax incentive
rather than true costs and benefits
Would consumption tax be better than income tax?
Administrative burden time spent on filling out forms and keeping records, hiring accountants,
exploiting loopholes
Average tax rate total taxes paid/income (%)
1. Measures fraction of income paid in taxes
Marginal tax rate extra taxes paid on additional dollar of income
1. Determines deadweight loss of income tax
Lump-sum tax everyone owes the same amount
1. The most efficient tax possible, but highly unfair (equity)
Taxes and equity
1. Benefits principle people should pay taxes based on benefits they receive from government
services
ie. Gasoline tax used to build roads, wealthy citizens for antipoverty programs

2. Ability-to-pay principle taxes levied on person according to how well they can shoulder the
burden
All citizens should make an equal sacrifice
Vertical equity taxes with greater ability to pay should pay larger amts
o Proportional tax all taxpayers pay the same fraction of income
o Regressive tax high income taxpayers pay larger fraction of income than low
income taxpayers
Horizontal equity taxpayers with similar abilities to pay should pay the same amount
3. Flypaper theory of tax incidence burden of a tax sticks wherever it first lands
Rarely true ie taxing furs
4. Tax incidence the study of who bears the burden of taxes