Page 670 - Economics

CONFIRMING PAGES

CHAPTER 29
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Public Choice Theory and the Economics of Taxation
Summary
1. Public choice theory examines the economics of govern- greater income should be taxed more, absolutely and rela-
ment decision making, politics, and elections. tively, than those who have less income.
2. Majority voting creates a possibility of (a) an underalloca- 5. The Federal personal income tax is progressive. The corpo-
tion or an overallocation of resources to a particular public rate income tax is roughly proportional. General sales,
good and (b) inconsistent voting outcomes. The median- excise, payroll, and property taxes are regressive.
voter model predicts that, under majority rule, the person 6. Excise taxes affect supply and therefore equilibrium price
holding the middle position on an issue will determine the and quantity. The more inelastic the demand for a product,
outcome of an election involving that issue. the greater is the portion of an excise tax that is shifted to
3. Public choice theorists cite reasons why government might consumers. The greater the inelasticity of supply, the larger
be inefficient in providing public goods and services. is the portion of the tax that is borne by the seller.
(a) There are strong reasons for politicians to support spe- 7. Taxation involves the loss of some output whose marginal
cial-interest legislation. (b) Politicians may be biased in fa- benefit exceeds its marginal cost. The more elastic the sup-
vor of programs with immediate and clear-cut benefits and ply and demand curves, the greater is the efficiency loss (or
difficult-to-identify costs and against programs with imme- deadweight loss) resulting from a particular tax.
diate and easily identified costs and vague or deferred ben- 8. Sales taxes normally are shifted to consumers; personal
efits. (c) Citizens as voters and congressional representatives income taxes are not shifted. Specific excise taxes may or
face limited and bundled choices as to public goods and may not be shifted to consumers, depending on the elastici-
services, whereas consumers in the private sector can be ties of demand and supply. There is disagreement as to
highly selective in their choices. (d) Government whether corporate income taxes are shifted. Property taxes
bureaucracies have less incentive to operate efficiently than on owner-occupied property are borne by the owner; those
do private businesses.
on rental property are borne by tenants.
4. The benefits-received principle of taxation states that those 9. The Federal tax structure is progressive; the state and local
who receive the benefits of goods and services provided by tax structure is regressive; and the overall tax structure is
government should pay the taxes required to finance them. slightly progressive.
The ability-to-pay principle states that those who have

Terms and Concepts

public choice theory special-interest effect regressive tax
logrolling rent seeking proportional tax
paradox of voting benefits-received principle tax incidence
median-voter model ability-to-pay principle efficiency loss of a tax
government failure progressive tax

Study Questions

1. Explain how affirmative and negative majority votes can Rankings
sometimes lead to inefficient allocations of resources to Public Good Jay Dave Conan
public goods. Is this problem likely to be greater under a
benefits-received or under an ability-to-pay tax system? Courthouse 2d choice 1st choice 3d choice
Use the information in Figures 29.1a and 29.1b to show School 3d choice 2d choice 1st choice
how society might be better off if Adams were allowed to Park 1st choice 3d choice 2d choice
buy votes.
2. KEY QUESTION Explain the paradox of voting through 3. KEY QUESTION Suppose there are only five people in a so-
reference to the accompanying table, which shows the ciety and each favors one of the five highway construction
ranking of three public goods by voters Jay, Dave, and options in Table 28.2 (include no highway construction as
Conan: one of the options). Explain which of these highway options

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