Pigovian tax

Examples of Pigovian tax in the following topics:

• Tax

  • Taxes are a market-based policy option available to the government to address externalities.
  • A corrective tax (also called a Pigovian tax) is applied to a market activity that is generating negative externalities (costs for a third party).
  • As the figure demonstrates, a tax shifts the marginal private cost curve up.
  • The level of the corrective tax is intended to counterbalance the externality.
  • A tax shifts the marginal private cost curve up by the amount of the tax.

• Corporate and Payroll Taxes

  • Many countries impose a corporate tax, also called corporation tax or company tax, on the income or capital of some types of legal entities.
  • The taxes may also be referred to as income tax or capital tax.
  • The effective tax rate is the average corporate tax rate on the company's income and this takes into consideration tax benefits included in a current tax year.
  • Corporations are also subject to a variety of other taxes including: property tax, payroll tax, excise tax, customs tax and value-added tax along with other common taxes, generally in the same manner as other taxpayers.
  • Deductions from an employee's wages are taxes that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax (PAYE), or pay-as-you-go tax (PAYG).

• Comparing Marginal and Average Tax Rates

  • An average tax rate is the ratio of the total amount of taxes paid, T, to the total tax base, P, (taxable income or spending), expressed as a percentage.
  • Broadly, the marginal tax rate equals the change in taxes, divided by the change in tax base, expressed as a percentage.
  • A progressive tax is a tax in which the tax rate increases as the taxable base amount increases .
  • A regressive tax is a tax imposed in such a manner that the average tax rate decreases as the amount subject to taxation increases .
  • A proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases.

• Tax Rate

  • The tax rate is the amount of tax expressed as a percentage.
  • In a tax system, the tax rate describes the ratio at which a business or person is taxed .
  • An average tax rate is the ratio of the amount of taxes paid to the tax base (taxable income or spending).
  • To calculate the average tax rate on an income tax, divide the total tax liability by the taxable income.
  • A marginal tax rate is the tax rate that applies to the last dollar of the tax base (taxable income or spending) and is often applied to the change in one's tax obligation as income rises.

• Individual Taxes

  • In U.S. constitutional law, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership.
  • These include income tax witholding, social security and medicare taxes, and unemployment taxes.
  • Sales tax is an indirect tax levied on the state level, including taxes on retail sale, lease and rental of goods, as well as some services.
  • Sales tax is calculated as the purchase price times the appropriate tax rate.
  • The estate tax is an excise tax levied on the right to pass property at death.

• Taxes

  • Examples of an indirect tax include sales tax and VAT (value added tax).
  • Progressive Tax: The more a person earns, the higher the tax rate.
  • Regressive Tax:In a regressive tax system, poorer families pay a higher tax rate.
  • Although a regressive tax system is never explicitly used, some claim a sales tax is a type of regressive tax.
  • Categorize types of taxes into ad valorem taxes and excise taxes

• The Federal Tax System

  • Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes.
  • State taxes are generally treated as a deductible expense for federal tax computation.
  • Certain alternative taxes may apply.
  • Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.
  • Similar to federal income taxes, federal estate and gift taxes are imposed on worldwide property of citizens and residents and allow a credit for foreign taxes.

• Financing State and Local Government

  • Taxes are the primary source of revenue for state and local governments; income, property, and sales taxes are common examples of state and local taxes.
  • State taxes are generally treated as a deductible expense for federal tax computation.
  • Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.
  • Property tax is generally imposed only on real estate, though some jurisdictions tax some forms of business property.
  • Property tax rules and rates vary widely.

• Tax Incidence and Elasticity

  • Tax incidence refers to who ultimately pays the tax, the producer or consumer, and the resulting societal effect..
  • Tax incidence is said to "fall" upon the group that ultimately bears the burden of, or ultimately has to pay, the tax.
  • The imposition of the tax causes the market price to increase from P without tax to P with tax and the quantity demanded to fall from Q without tax to Q with tax.
  • The producer is unable to pass the tax onto the consumer and the tax incidence falls on the producer.
  • In this example, the tax is collected from the producer and the producer bears the tax burden.

• Trading off Equity and Efficiency

  • Income taxes are a laddered progressive tax where income tax rates are set in income bands or ranges.
  • The purpose of a progressive tax system is to increase the tax burden to those most able to pay.
  • These individuals and groups support a flat tax or proportional tax instead.
  • Income tax is a progressive tax that assumes a regressive nature at the highest tax rate.
  • Explain tax equity in relation to the progressive, proportional, and regressive nature of taxes.