how does an extra dollar of income get taxed and what

incentives are created?

many benefits paid by gov't are targeted by income and
subject to reduction as income increases. Often brr (benefit
reduction rate) viewed as tax on extra income.
base of FED PIT
earning + k(income)+transfers+where allow for
deductions+tax credits + partial inclusion or full exclusion
of other income
What are excise taxes?
taxes on specific goods at various rates by fed + prov
what are user fees?
financing based on use of a good or service eg: power
benefits of free trade (3)
1) consumers get access to broadest range of products at
lowest cost2) trade constraints domestic producers to be
more efficient3) export opportunities for domestic firms
provide incentives to increase productivity and innovation
3 principles of a tax system in international

trade/competition
1) tax system should be neutral2) tax system should
encourage innovation and other activities that increase
productivity 3) tax system needs to recognize that factors
of production are mobile internationally
for tax neutrality in international competition taxes
should be non-discriminatory with respect to ...(4)
1) the type of business and products2)factor hiring choice
3) choice of how to finance investment4) types of
investment
what is source based taxation?
tax all capital (k) income in Canada regardless of who
earns it, regardless of nationality of producers. It is
particularly susceptible to capital flow induced by tax
difference
what is residence based taxation?
tax all return to capital earned by Canadian residents
wherever earned in the world. Less susceptible than
source-based, in order to escape the higher tax must
change residences.
Why has their been a large increase in gov. spending? (2)

1) expansion of the welfare state2) productivity growth

slow in the public sector
name three issues of fiscal federalism (prov and fed
working together)
1) provs or municip. may engage in wasteful tax2) provs
have to worry about tax rates on mobile L+K3) raise issue
of where tax should reside
what is vertical equity?
how you treat ppl who are different. should pay taxes based
on your ability to pay them, redistribution from richer to
poorer citizens
how does the PIT interfere with choices? (6)
1) tax on L earnings drives a wedge btwn wage worker
receives net of tax and wage paid by firm2) tax on k income
affect saving choice and forms of savings3) asymmetric
treatment of gains vs. losses affect willingness to invest in
risky ventures4) to the extent that your primary residence
is not subject to capital gains tax, could distort asset
accumulation toward housing5) to the extent we treat
interest, capital gains and dividends differently, this will
distort choices6) to the extent tax on future income
increases may affect decisions wrt. human k investments
how does the CIT interfere with choices? (6)

1) if tax on corp k differs from tax on non-corp k then may

distort choice of whether to incorporate or not2) given CIT
rates differ by province, size of corp., nature of activity, all
of which favors movement of corp k to lowest tax regime3)
diff't types of investment in k are treated differently given
the existence of different depreciation rates and the
existence of investment credits. All that means that you
might see distortion in the choice of investment4) CIT
allows for a deduction for interest costs paid on
investments financed by borrowing, therefore investment
financing choice biased in favour of debt5) CIT treats pos
and neg tax liabilities different, in particular not all losses
can be written off vs gains, bias against risk-taking and
entrepreneurship6) to the extent CIT reduces the rate of
return on investment may well discourage investment
How does GST/HST distort choice? (4)
1) broad base is good because it limits distortion of choice,
single rate2) to extent that is a tax on consumption and
consumption is purchased with income, it may have
similar effects to PIT except likely to be smaller due to the
lower tax rate3) some goods are exempt, some have a lower
rate, which implies distortions in choice between taxed and
un-taxed goods4) if you wish to minimize the DWL
associated with a given amount of revenue raise for the
gov., what you should do is structure rates on goods
according to inverse-elasticity rule
What is the CIB tax base?
sum of current consumption+ changes in net wealth

name 6 problems with CIB as income base

1) need to tax capital gains on accrual, when change in
asset value occurs2) when incomes fluctuate annually and
youre in the presence of a progressive tax system can see
horizontal inequity vs. notion of taxing more "permanent"
notion of income3) may have to adjust CIB to reflect the
fact that you might have 2 ppl whose utilities are different
for the same task, thus should be taxed differently4)
administrative problems; difficult to value assets on
accrual basis5) inflation; rates need to adjust according to
inflation every year6) choice about tax paying unit; family
or individual
name 3 tax bases within consumption
1) Consumption services2) Expenditure3) K-income
exempt
describe the Consumption Service tax base
includes all expenditures on non-durable goods and the
flow of consumption services from durable goods

describe the expenditure consumption tax base

includes all expenditures on durable and non-durable
goods in the year theyre made

who bears the burden of a tax? (2)

1)statutory - who legally must remit tax to gov.2) economic who bears tax after its imposed and price, quantity
adjustments occur
Tax: Incidence
division, BURDEN of tax between BUYER & SELLER

Excess Burden
deadweight loss from tax
Taxable Income
total income minus personal exemption and std deduction
Tax Rate: Marginal
% of additional dollar of income paid in tax100 x (change
tax/change income)Ex: Tax = $0.39, rate = 39%
Tax Rate: Avg
% TOTAL income paid in tax(total tax/total income) x 100

Tax: Progressive
avg TAX rate INC, as INCOME INC
Tax: Proportional
avg rate CONST at all income levelsDOES NOT CHANGE
Tax: Regressive
avg rate DEC, as income INC
Tax: Payroll
imposed on employers, based on wages they pay workers
Principle: Benefits
people pay taxes = benefits received from public goods &
svcs
Principle: Ability to Pay
rich, high income are asked to pay higher taxesworks on:
horizontal, vertical equity
Equity: Horizontal

taxpayers w/ same ability pay same taxes

Equity: Vertical
taxpayers w/ greater ability to pay bear a GREATER share
of the taxes
Big Trade Off
fairness & efficiency of taxes often conflictCapital Income
Tax: create DEADWEIGHT loss, capital mostly owned by
rich people, considered fair
Elasticity: Perfect Inelastic Demand
Buyer Pays, Efficient
Elasticity: Perfect Elastic Demand
Seller Pays, Inefficient (horizontal D)
Elasticity: Perfect Inelastic Supply
Seller Pays, Efficient (vertical S, no dead)

Elasticity: Perfect Elastic Supply

Buyer Pays, Inefficient