Revenues

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Revenues

• You Have To Have It Before You Can Spend It!

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Revenue Sources

• Taxes
• Borrowing (bonds, debt, etc.)
• Intergovernmental transfers (grants)
• Other, e.g.
• User Charges
• Quasi-business activities
• Sales of assets

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Taxes!!!

• Theyre GOOD, Really!

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Basic Terms

• Base The total value of the thing being taxed,
  e.g.
• Total personal income of US population
• Total assessed value of real property in
  Montgomery County
• Erosion (of base) Tax base shrinkage
• Due to natural (market) forces
• Due to policy decisions

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Basic Terms, cont.

• Rate The extent to which the base is actually
  taxed
• ad valorem Tax rate is expressed as a percentage
  of the value of the item being taxed (income
  general sales taxes)
• in rem Tax rate is expressed as a cash amount
  per unit of the item being taxed (gasoline and
  liquor excises)

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Basic Terms, cont.

• Revenues The amount actually collected. Can be
  calculated by the formula
• Revenues Base Rate
• (This is an important equation, remember it!)

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Basic Terms, cont.

• Cash Flow Money circulating in the economy
• Income
• Sales
• Wealth (or stock) Valuable items that are being
  held, rather than circulating, e.g.
• Real estate
• Stocks, bonds
• Art

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Criteria

• Productivity (adequacy collectibility)
• Elasticity
• Incidence (business individual shares)
• Equity (ability to pay v. benefit)
• Neutrality (economic effects)
• Transparency
• Political acceptability

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Productivity (Adequacy Collectibility)

• Depends on
• Size of base
• Rate
• Collection costs (to the government)
• Is fundamental

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Elasticity, a.k.a. Stability

• The rate at which tax revenues change (grow or
  decline), relative to changes in the base
• Formula
  Elasticity ?Revenues/ ?Base
• Where ? Rate of change (in )

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Elasticity Interpretation

• Elasticity gt 1.0 means that revenues change more
  rapidly than the base (tax revenues are elastic)
• Elasticity lt 1.0 means that revenues change less
  rapidly than the base (tax revenues are
  inelastic, or stable)

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Desirability Depends Upon

• Direction of economy
• Direction of demand for governments services
• Direction of costs of doing government business

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Incidence (Business Individual Shares)

• Involves the question of who actually pays the
  tax
• Types
• Direct Tax is actually paid by the person or
  institution upon whom it is levied (income tax)
• Indirect Tax is levied at one point, but is
  shifted to another (sales tax)

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Equity (Fairness)

• Is a key issue, especially in democracies
• There are two attractive but mutually
  incompatible ways of assessing it
• Ability to pay (John Stuart Mill)
• Benefit (Adam Smith)

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Ability To Pay

• Taxpayers should be liable insofar as they are
  capable of bearing the burden
• Two aspects
• Horizontal equity Taxpayers in similar economic
  circumstances should pay similar amounts
• Vertical equity Taxpayers in dissimilar economic
  circumstances should pay dissimilar amounts

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Horizontal Equity

• Similarity of circumstances can be difficult to
  define
• Income
• Wealth
• Dependents
• Adverse circumstances (health, etc.)
• Deductions exemptions affect it

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Vertical Equity

• Progressive tax Those with a greater ability,
  pay proportionately more (not just more money)
• Regressive tax Those with a greater ability,
  pay proportionately less
• Proportional tax Everyone pays roughly the same
  proportion of their income

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Benefit A Different Basis For Determining Equity

• Those who benefit from government activity should
  pay for it (in rough proportion to the amount of
  their benefits)
• Applications Special property tax assessments,
  user charges, etc.

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Benefit Application Problems

• Those with greatest need may be unable to pay
• Evaluating services
• Politicization
• etc.

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Neutrality (Economic Effects)

• A neutral tax is one which does not distort the
  functioning of a free market
• Income effects (all taxes)
• Substitution effects (non-neutral taxes)
• In general, neutral taxes are seen as being
  desirable (because the market works more
  efficiently)

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Neutrality Its Desirable, But

• There are lots of non-neutral taxes out there
• It is hard to find a truly neutral tax, except
  for head taxes (capitations)
• Louis XVI
• Margaret Thatcher

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Neutrality, cont.

• Certain non-neutralities are seen as being
  desirable, e.g.
• To encourage or discourage behavior
• To fix accountability
• To implement benefit principal

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Transparency

• A tax should contribute to rational decision
  making (effectiveness)
• Taxes in which there is a clear, direct linkage
  between taxes paid and benefits received will
  accomplish this. Earmarking, etc. can help
• Adoption, compliance, liability should be clear
  easy to determine

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Political Acceptability

• What will sit well with the public, with
  elected officials counts, changes from time to
  time
• Income tax was popular for several decades
• Sales tax may be more popular now
• Property tax?

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Political Acceptability

• The art of taxation consists in so plucking the
  goose as to obtain the largest amount of feathers
  with the least possible amount of hissing J.B.
  Colbert, finance minister to H.R.H. Louis XIV,
  King of France

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