I n t h I s c h a p t e r y o u w I l L

A
MOUNT
A
MOUNT
P
ERCENT OF
T
AX
(
IN BILLIONS
)
PER
P
ERSON
OF
R
ECEIPTS
Sales taxes
$ 249
$ 940
20%
Property taxes
209
789
17
Individual income taxes
147
554
12
Corporate income taxes
32
121
3
From federal government
235
887
19
Other
351
1,324
29
Total
$1,223
$4,615
100%
S
OURCE
:
Economic Report of the President,
1999, table B-86.

---

2 5 0
PA R T F O U R
T H E E C O N O M I C S O F T H E P U B L I C S E C T O R
Q U I C K Q U I Z :
What are the two most important sources of tax revenue for 
the federal government?
◆
What are the two most important sources of tax 
revenue for state and local governments?
TA X E S A N D E F F I C I E N C Y
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:
◆
The deadweight losses that result when taxes distort the decisions that
people make
◆
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.
D E A D W E I G H T L O S S E S
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.
Ta b l e 1 2 - 6
S
PENDING OF
S
TATE AND
L
OCAL
G
OVERNMENTS
: 1996