Page 246 - The Principle of Economics

250 PART FOUR THE ECONOMICS OF THE PUBLIC SECTOR
Table 12-6
SPENDING OF STATE AND LOCAL GOVERNMENTS: 1996
AMOUNT
(IN BILLIONS)
Education
Public welfare
Highways 79 Other 518
Total $1,193
SOURCE: Economic Report of the President, 1999, table B-86.
AMOUNT
PER PERSON
$1,506 743 298 1,955
$4,502
PERCENT
OF SPENDING
33% 17
7 43
100%
CATEGORY
$ 399 197
QUICK QUIZ: What are the two most important sources of tax revenue for the federal government? N What are the two most important sources of tax revenue for state and local governments?
TAXES AND EFFICIENCY
Now that we have seen how the U.S. government at various levels raises and spends money, let’s consider how one might evaluate its tax policy. Obviously, the aim of a tax system is to raise revenue for the government. But there are many ways to raise any given amount of money. In designing a tax system, policymakers have two objectives: efficiency and equity.
One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers. What are the costs of taxes to taxpayers? The most obvious cost is the tax payment itself. This transfer of money from the taxpayer to the government is an inevitable feature of any tax system. Yet taxes also impose two other costs, which well-designed tax policy tries to avoid or, at least, minimize:
N The deadweight losses that result when taxes distort the decisions that people make
N The administrative burdens that taxpayers bear as they comply with the tax laws
An efficient tax system is one that imposes small deadweight losses and small ad- ministrative burdens.
DEADWEIGHT LOSSES
Taxes affect the decisions that people make. If the government taxes ice cream, people eat less ice cream and more frozen yogurt. If the government taxes housing, people live in smaller houses and spend more of their income on other things. If the government taxes labor earnings, people work less and enjoy more leisure.