MPA Comp Exam - PADM 5400/5420 (Budget & Revenue)correctly answered 2023

MPA Comp Exam - PADM 5400/5420 (Budget & Revenue)correctly answered 2023How do managers promote stability during economic cycles? "diversification in the property tax base and revenue sources and on the flexibility in spending...[generally leads to]...more stable operating budgets" (Bland, 2013: 10). ----------------------------------- Bland's 3-Legs of Balanced Tax policies ----------------------------------- Bland's Laws of Taxation ----------------------------------- Bland's 7 Suggestions for Making Revenue Decisions How to Achieve a Balanced Tax Policy (aka Bland's 3-Legs of Tax Policies) 1) Equity (What is fair?) 2) Neutrality (What is economic efficiency?) 3) Tax Administration (How much does it cost to collect, enforce, and comply with?) ------------------------------------------- ***Trade-offs exist between the three (for more info see Bland's 7 suggestions for making revenue decisions) Bland's Laws of Taxation (Lecture Notes: Session 4) First Law of Taxation: The greater the equity in allocating the tax burden the greater the complexity of the tax code. (Lecture Notes Session 4) Corollary: The greater the complexity of the tax code, the higher the administrative and compliance costs. (Lecture Notes Session 4) ----------------------------------- Second Law of Taxation: The broader the base and the flatter the rate, the more neutral the tax. (Lecture Notes Session 4) ----------------------------------- Third Law of Taxation: The more heavily a tax is used, the more appropriate its economic deficiencies. (Lecture Notes Session 4) 3-Legs of Balanced Tax Policies: Equity (What is fair?) How should the tax burden be measured? Most common measure = annual income Effective tax rate (aka relative tax burden) = tax liability (TL)/current income tax burden = TL/income "...broader measure" = lifetime income ----------------------------------- Types of Equity: 1) Vertical 2) Horizontal ----------------------------------- First Law of Taxation: The greater the equity in allocating the tax burden the greater the complexity of the tax code. (Lecture Notes Session 4) Corollary: The greater the complexity of the tax code, the higher the administrative and compliance costs. (Lecture Notes Session 4) ------------------------------------------- Fundamental Elements of Equitable Tax Policy (Bland, 2013: 28-31): "Benefits-based levies are the most defensible in terms of fairness. Tax favors to particularly vocal or well-connected groups undermine the perceived equity of the revenue structure. Revenue polices should ease the burden on the poorest and not punish the wealthiest. Tax fairness varies among local communities, depending on their age, income distribution, and preference for public services" (Bland, 2013: 28). ----------------------------------- Hoizontal Equity Treating individuals/businesses in similar circumstances the same (Lecture Notes) ----------------------------------- What does "similiar" mean? See: ~Uniformity clauses; ~14th amendment; ~Magna Charta-1215 (Lecture Notes Session 4) ----------------------------------- In PA uniformity defined in courts (Lecture Notes Session 4) ----------------------------------- What consititutes equal circumstances? Majority/community decides what is equal/fair **REMEMBER** If you cut it now it'll still come back and someone else will have to pay for it (i.e., intergenerational equity) (Lecture Notes Session 4) Vertical Equity "...variation in tax burden among taxpayers in different circumstances" (Bland, 2013: 27). ----------------------------------- "...how that burden varies across the spectrum of income comparable to the income statement" (Bland, 2013: 27). ----------------------------------- treating people in different economic circumstances differently (Lecture Notes Session 4) ----------------------------------- Ability-to-pay principle "...those with the greater ability to pay - usually measured in terms of annual income or wealth - should bear a greater share of the burden for financing government" (Bland, 2013: 28). **REMEMBER**this principle is subject to Tiebout's Theory (i.e., "voting with one's feet") Taxes that use this principle are better administered by the federal government (or the state). ----------------------------------- Need to Answer 2 Questions: 1) What basis is ability measured? (e.g., earned or unearned income; tax exempt interest; permanent income; net income; wealth) 2) How differently are differences treated? (e.g., regressive, proportional, progressive) Regressive tax distribution "A measure of the distribution of the burden of a tax or service charge across household income. If that distribution declines relative to household income, it is a regressive distribution. A regressive distribution may occur if the tax liability actually increases across household income categories. But if that taz burden as a percentage of household income declines as household income increase, it is a regressively distributed tax burden." (Bland, 2013: Glossary - p318) ---------------------------------------------- "...the effective tax burden declines as income increases" (Bland, 2013: 27) tax burden increase as income decreases (Bland, 2013: 27) Progressive tax distribution "A measure of the distribution of the burden of a tax or service charge across household income. If that distribution increase relative to household income, it is progressive distribution. If a tax burden as a percentage of household income increases as household income increases, it is a progressively distributed" (Bland, 2013: Glossary - p317). ---------------------------------------------- "...the effective tax burden increases across the income spectrum, resulting in both absolute and relatively higher tax burdens for higher-income households" (Bland, 2013: 27). tax burden increases as income increases (Bland, 2013: 27) Proportional tax distribution (aka Flat Tax) "A distribution of the tax or service charge burden such that the effective tax rate remains flat across the income spectrum. That is, lower-income households incur a tax burden that takes the same percentage of their income (or wealth) as it does from higher-income households" (Bland, 2013: Glossary - p317). ------------------------------------------- "the effective tax rate remains flat across the income sprectum" (Bland, 2013: 27) Tax Neutrality (What is economic efficiency and how to promote it?) Bland's Second Law: The broader the base and the flatter the rate, the more neutral the tax (Lecture Notes Session 4) -------------------------------------------- The impact that a revenue source has on economic behavior (Lecture Notes Session 4) -------------------------------------------- Nonneutral decisions lead to deadweight loss (i.e., inefficiency) -------------------------------------------- "The challenge [facing PAs] is to design a tax structure in which unintended interference is minimized" (Bland, 2013: 34). -------------------------------------------- "[A]ddresses the impact of tax and revenue policeis on the local economy. Achieving neutral tax policies requires extrodinary care that cannot be found on the cutting-room floor of political compromise. Tax neutrality is intentional. It places the community's long-term economic viability ahead of short-term political accomodation" (Bland, 2013: 31) -------------------------------------------- Trade-offs exists between equity and neutrality (i.e., inverse relationship) (Lecture Notes Session 4) -------------------------------------------- "policies that minimize market distortions and maximize economic growth" (Bland, 2013: 39). Issues in Neutrality (1) Border-city effects (2) Tax exportation (3) Flat-taxes Border-city effects "The negative exonomic consequences that occur when tax rates or service charges differe substantially among local governments within region, thereby violating the principle of tax neutrality. Households and businesses make economic decisions on the basis of tax (or service charge) considerations. Such behavior creates a net drain on the productive output of the local economy" (Bland, 2013: Glossary - p305) --------------------------------------- Ex. (1) Sales tax - Oregon's no sales tax has a border-city effect on Washington, Idaho, California; or DE/PA (2) Texarkana (Arkansas exempts Texarkana residents from its state income-tax) Tax exportation "The shifting of the tax burden to nonresidents. Local governments export their tax burden through such means as hotel and motel taxes, entertainment taxes, taxes on the income or purchases of commuters, and taxes on businesses selling other products or services to customers outsider the taxing jursidiction" (Bland, 2013: Glossary, p 321) Flat-rate taxes " A uniform fee based on the average cost of serving all users. While it is simple to administer, a flat fee reguires that users whose costs are below average must subsidize those whose costs are above average. Because a flat-rate pricing structure creates no incentive to reduce wasteeful consumption, it should be used only when it is administratively infeasible to measure consumption" (Bland, 2013: Glossary, p310). Benefits received principle "those who benefit from a public service should bear a pro rata share of its costs" (Bland, 2013: 27) Benfits-based taxes (and charges) Emulate prices in the market -------------------------------------------- Ex - Fees-for-services/licenses, hotel/motel occupancy taxes; property tax How is property tax considered benefits-received? Crime decreases as property values increase allowing for better funding for public safety Examples of Equity-Neutrality Trade-offs (1) Progressive Tax Rates (2) Differential local sales tax rates (3) Two-tiered sales tax (4) Sales tax on food and all consumables (5) Property Tax (6) Corporate Income Administration (How much does it cost to collect, enforce, and comply with?) 3 Areas of Administration (1) Notification (2) Collection (3) Enforcement Compliance costs ... Administrative Costs ... Problems Associated with Tax Enforcemnet Tax Avoidance Tax Delinquency Tax Evasion Taxable Nexus ...