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ECON305: Public Finance

Unit 2: Taxes   In this unit, we will familiarize ourselves with the different kinds of taxes that exist in policy today, including those that are less frequently used.  This unit will distinguish the elements of a tax: (a) the taxable base, which is the object or activity that the tax payment is calculated on, (b) the person who remits the tax payment by actually cutting a check to the government, and (c) the person(s) who bear the economic burden of the tax.  You will learn that economists distinguish between who pays a tax and whose behavior changes because of a tax.  In ordinary conversations, these are often confused, but our toolset will show that the tax burden doesn’t always fall on the person or company that is explicitly being taxed.  We will also consider the cost of deadweight losses, or welfare that is lost due to the changing behavior of individuals given different policy choices.  Rational choice individuals don’t like to pay taxes, so we will see the different ways that they avoid paying taxes by changing what they invest in, and how much they are willing to work based on the taxation of income.

2.1 Types of Taxes   2.1.1 Personal Income Taxes   - Reading: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “The Personal Income Tax” and Tamahome Jenkins’ “A Short History of the Income Tax” Link: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “The Personal Income Tax” (PDF) and Tamahome Jenkins’ “A Short History of the Income Tax” (PDF)
 
Also available in:

[EPUB](http://www.saylor.org/site/wp-content/uploads/2011/07/ECON305-2.1.1-guidebook-Understanding-Our-Tax-System_-A-Primer-for-Active-Citizens_-_Personal-Income-Doug-Howgate.epub)  

 Instructions: Please read the entirety of both readings.  The Wise
et al reading is Kurt Wise and Noah Berger's guidebook, which is
publicly available under a creative commons license on the
Massachusetts Budget and Policy Center’s website
(http://www.massbudget.org).  
    
 Terms of Use: The Wise article is released under a [Creative
Commons Attribution-NonCommercial License
3.0](http://creativecommons.org/licenses/by-nc/3.0/).  You can find
the original version of the Howgate article
[here](http://www.massbudget.org/reports/pdf/Tax_Primer_83110.pdf).  

 Terms of Use: The Jenkins article is released by Everything Is
History by Steven Durham under a [Creative Commons
Attribution-NonCommercial
3.0](http://creativecommons.org/licenses/by-nc/3.0/).  You can find
the original version of the Jenkins article
[here](http://everythingishistory.com/).

2.1.2 Corporate Income and Business Taxes   - Reading: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “Business Taxes and Corporate Income Tax” Link: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “Business Taxes” (PDF) and “Corporate Income Tax” (PDF)
 
Also available in:

[EPUB](http://www.saylor.org/site/wp-content/uploads/2011/07/ECON305-2.1.1-guidebook-Understanding-Our-Tax-System_-A-Primer-for-Active-Citizens_-_Personal-Income-Doug-Howgate.epub)  

 Instructions: Please read both selections from Kurt Wise and Noah
Berger’s guidebook, which is publicly available under a creative
commons license on the Massachusetts Budget and Policy Center’s
website (http://www.massbudget.org).  
    
 Terms of Use: The article above is released under a [Creative
Commons Attribution-NonCommercial License
3.0](http://creativecommons.org/licenses/by-nc/3.0/).  You can find
the original Wise version of these
articles [here](http://www.massbudget.org/reports/pdf/Tax_Primer_83110.pdf).

2.1.3 Sales Taxes   - Reading: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “Business Taxes & Corporate Income Tax” and Dave Farnsworth’s “Sales Tax” Link: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “General Sales Tax” (PDF) and Dave Farnsworth’s “Sales Tax” (PDF)
 
Also available in:

[EPUB](http://www.saylor.org/site/wp-content/uploads/2011/07/ECON305-2.1.1-guidebook-Understanding-Our-Tax-System_-A-Primer-for-Active-Citizens_-_Personal-Income-Doug-Howgate.epub)  

 Note on the Text: Please read both readings.  The Wise et al
reading is Kurt Wise and Noah Berger’s guidebook, which is publicly
available under a creative commons license on the Massachusetts
Budget and Policy Center’s website (http://www.massbudget.org).  
    
 Terms of Use: Terms of Use: The article above is released under
a [Creative Commons Attribution-NonCommercial License
3.0](http://creativecommons.org/licenses/by-nc/3.0/).  You can find
the original Howgate version of this
article [here](http://www.massbudget.org/reports/pdf/Tax_Primer_83110.pdf). Please
respect the copyright and terms of use displayed on the web pages
above.

2.1.4 Property Taxes   - Reading: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “Property Tax” and Roby Smith’s “Understanding Property Taxes” Link: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “Property Tax” (PDF) and Roby Smith’s “Understanding Property Taxes” (PDF)
 
Also available in:

[EPUB](http://www.saylor.org/site/wp-content/uploads/2011/07/ECON305-2.1.1-guidebook-Understanding-Our-Tax-System_-A-Primer-for-Active-Citizens_-_Personal-Income-Doug-Howgate.epub)  

 Instructions: Please read both readings.  The Wise et al reading is
Kurt Wise and Noah Berger’s guidebook, which is publicly available
under a creative commons license on the Massachusetts Budget and
Policy Center’s website (http://www.massbudget.org).  
    
 Terms of Use: The Wise article is released under a [Creative
Commons Attribution-NonCommercial License
3.0](http://creativecommons.org/licenses/by-nc/3.0/).  You can find
the original version of the Howgate article
[here](http://www.massbudget.org/reports/pdf/Tax_Primer_83110.pdf).   

 Terms of Use: The Smith article is released under a [Creative
Commons Attribution-NoDerivs 3.0 Unported
License](http://creativecommons.org/licenses/by-nd/3.0/).  You can
find the original version of the Smith article
[here](http://www.articlealley.com/article_1748720_33.html).

2.1.5 Excise Taxes   - Reading: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “Selective Sales Tax” Link: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “Overview of Selective Sales Tax” (PDF)
 
Also available in:

[EPUB](http://www.saylor.org/site/wp-content/uploads/2011/07/ECON305-2.1.1-guidebook-Understanding-Our-Tax-System_-A-Primer-for-Active-Citizens_-_Personal-Income-Doug-Howgate.epub)  

 Instructions: Please read this selection.  The Wise et al reading
is Kurt Wise and Noah Berger’s guidebook, which is publicly
available under a creative commons license on the Massachusetts
Budget and Policy Center’s website (http://www.massbudget.org).  
    
 Terms of Use: The article above is released under a [Creative
Commons Attribution-NonCommercial License
3.0](http://creativecommons.org/licenses/by-nc/3.0/).  You can find
the original Wise*’*s version of this article
[here](http://www.massbudget.org/reports/pdf/Tax_Primer_83110.pdf).

2.1.6 Head Taxes   - Reading: New World Encyclopedia’s: “Poll Tax” Link: New World Encyclopedia’s: “Poll Tax” (PDF)
 
Instructions: Click on the above link to access the reading.  Please read the text in its entirety.
 
Terms of Use: This work is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.  This work was created by contributions from both New World Encyclopedia and Wikimedia Foundation contributors.  The original New World Encyclopedia article can be found here.

2.1.7 Standard Criteria for Taxes and Tax Systems   - Reading: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “Standard Criteria for Taxes and Tax Systems” Link: Kurt Wise et al’s Understanding Our Tax System: A Primer for Active Citizens: “Five Criteria for Assessing Taxes and Tax Systems” (PDF)
 
Also available in:

[EPUB](http://www.saylor.org/site/wp-content/uploads/2011/07/ECON305-2.1.1-guidebook-Understanding-Our-Tax-System_-A-Primer-for-Active-Citizens_-_Personal-Income-Doug-Howgate.epub)  

 Instructions:  Please read this selection.  The Wise et al reading
is Kurt Wise and Noah Berger’s guidebook, which is publicly
available under a creative commons license on the Massachusetts
Budget and Policy Center’s website (http://www.massbudget.org).  
    
 Terms of Use: The article above is released under a [Creative
Commons Attribution-NonCommercial License
3.0](http://creativecommons.org/licenses/by-nc/3.0/).  You can find
the original Wise version of this article
[here](http://www.massbudget.org/reports/pdf/Tax_Primer_83110.pdf).

2.1.8 Progressive and Regressive Taxation   - Reading: Jason Welker’s Economics in Plain English: “The Role of Taxes in Income Re-Distribution” Link:  Jason Welker’s Economics in Plain English: “The Role of Taxes in Income Re-Distribution” (HTML)
 
Instructions: Click on the above link to access the reading.  Please read the text in its entirety.
 
Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 United States License.  This article was written by Jason Welker for Welker’s Wikinomics Blog.  The original version of the article can be found here.

  • Lecture: Harvard University: Michael Sandel’s “Progressive Taxation – Freedom to Choose” Link: Harvard University: Michael Sandel’s “Progressive Taxation – Freedom to Choose” (Youtube)
     
    Instructions: Click on the above link to listen to an introductory lecture on economic philosophy at Harvard by Michael Sandel.  Please watch the lecture starting at 5:30.  When watching this video, ask yourself which side of the argument you find more compelling.
               
    Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

2.2 Impacts on Prices and Output   2.2.1 Incidence of Taxation and Dead Weight Losses   - Lecture: Tutor2u’s “Indirect Taxes” Link: Tutor2u’s “Indirect Taxes” (Adobe Flash)
 
Instructions: Please review the presentation in its entirety. 
 
Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

2.2.2 Excess Burden   - Reading: Preston McAfee’s Introduction to Economic Analysis: “6.1.3 Taxes: Excess Burden of Taxation” Link: Preston McAfee’s Introduction to Economic Analysis: “6.1.3 Taxes: Excess Burden of Taxation” (PDF)
 
Also available in:
Microsoft Word Document (Zip File)
 
Instructions: This reading is on pages 206-208 of Preston McAfee’s textbook, which is publicly available under a creative commons license on the author’s website (www.mcafee.cc/Introecon/). 
 
Terms of Use: The article above is released under a Creative Commons Attribution-Non Commercial-Share-Alike License 3.0.  You can find the original version of this article here.

2.2.3 Neutral Taxes   - Reading: Ludwig von Mises’ Human Action: The Scholars Edition: “XXVIII. INTERFERENCE BY TAXATION: The Neutral Tax” Link: Ludwig von Mises’ Human Action: The Scholars Edition: “XXVIII. INTERFERENCE BY TAXATION: The Neutral Tax” (PDF)
 
Instructions: Click on the above link to access the reading.  Please read the page of text in its entirety.
 
Terms of Use: This work is licensed under a Creative Commons Attribution 3.0 United States License.  This work is attributed to the Ludwig von Mises Institute.  The original version of this article can be found here.

2.2.4 Ramsey Taxation   - Reading: The Saylor Foundation’s “Handout on Ramsey Taxation” and Preston McAfee’s Introduction to Economic Analysis: “2.4.1 Elasticity of Demand” Link: The Saylor Foundation’s “Handout on Ramsey Taxation” (PDF) and Preston McAfee’s Introduction to Economic Analysis: “2.4.1 Elasticity of Demand” (PDF)

 Also available in (Preston McAfe):  
 [Microsoft Word Document (Zip
File)](http://www.mcafee.cc/Introecon/Current201.zip)  

 Instructions: The Saylor Foundation handout will describe the main
conclusions of Ramsey Optimal Taxation while the reading in the
McAfee textbook will provide a refresher on elasticity of demand,
for those who need it.  The McAfee reading is on pages 33-36 of
Preston McAfee’s textbook, which is publicly available under a
creative commons license on the author’s website
(www.mcafee.cc/Introecon/).    

 Terms of Use: Preston McAfee’s text above is released under a
[Creative Commons Attribution-Non Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  You can
find the original version of this article
[here](http://introecon.com/).

2.2.5 Lindahl Tax   - Reading: The Saylor Foundation’s “Handout on Lindahl Taxation” Link: The Saylor Foundation’s “Handout on Lindahl Taxation” (PDF)

 Instructions: Please read the entire handout.  When reading, think
about how much you might be willing to pay for different public
goods.  Is it possible to perceive your own willingness to pay for
those goods?  Have you seen the Lindahl solution in action?

2.2.6 Income Tax and Labor-Leisure Tradeoff   - Reading: The Saylor Foundation’s handout on “Income Tax and Labor-Leisure Tradeoff” and Preston McAfee’s Introduction to Economic Analysis: “5.2.2 Labor Supply” Link: The Saylor Foundation’s handout on “Income Tax and Labor-Leisure Tradeoff” (PDF) and Preston McAfee’s ** Introduction to Economic Analysis: “5.2.2 Labor Supply” (PDF)

 Also available in (Preston McAfee):  
 [Microsoft Word Document (Zip
File)](http://www.mcafee.cc/Introecon/Current201.zip)  

 Instructions: The Saylor Foundation handout will describe the
relationship between taxes and the labor-leisure tradeoff, while the
reading in the McAfee textbook will provide a refresher on labor
supply, for those who need it.  The McAfee reading is on pages
166-170 of Preston McAfee’s textbook, which is publicly available
under a creative commons license on the author’s website
(www.mcafee.cc/Introecon/).    

 Terms of Use: Preston McAfee’s text above is released under a
[Creative Commons Attribution-Non Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  You can
find the original version of this article
[here](http://introecon.com/).

2.2.7 The Laffer Curve   - Reading: Charles Kelly’s “Laffer Curve and Tax Revenue” and Wikipedia’s “Laffer-Curve” Link: Charles Kelly’s “Laffer Curve and Tax Revenue” (PDF) and Wikipedia’s “Laffer Curve” (PDF)
  
Instructions: Please read the Kelly reading in its entirety through the above link.  You can see an example of a Laffer Curve by clicking on the Wikipedia link.

 Terms of Use: The Charles Kelly article is licensed under a
[Creative Commons Attribution-NoDerivs 3.0 Unported
License](http://creativecommons.org/licenses/by-nd/3.0/).  You can
find the original version of the Kelly article
[here](http://www.articlesbase.com/international-studies-articles/laffer-curve-and-tax-revenue-2218809.html).  

 Terms of Use: The Wikipedia article above is released under a
[Creative Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/).  You can find
the original Wikipedia version of this article
[here](http://en.wikipedia.org/wiki/File:Laffer-Curve.svg).