Public Economics
Taxes
Government revenue collection — types, incidence, efficiency
Taxes are mandatory payments from individuals/businesses to government. Types: (1) Income tax — on earnings; progressive (higher earners pay more). (2) Sales/consumption tax — on purchases. (3) Property tax — on real estate. (4) Corporate tax — on profits. (5) Excise — on specific goods. Plus: Social Security, capital gains, estate. Tax incidence: who bears burden (legal payer ≠ economic burden). Efficient taxes: minimize deadweight loss; broad base, low rates. Progressive vs regressive vs flat. Tax policy: balance revenue, equity, efficiency. Major debates: fairness, simplicity, growth effects.
- Major US taxesIncome, payroll, sales, property, corporate
- Federal revenue 2023~$4.4 trillion
- Income tax progressiveHigher earners pay higher rates
- Tax incidenceWho bears burden ≠ legal payer
- Deadweight lossInefficiency from taxes
- Trade-offsRevenue, equity, efficiency
Interactive visualization
Press play, or step through manually. The visualization is yours to drive — try it before reading on.
Watch the 60-second explainer
A condensed visual walkthrough — narrated, captioned, under a minute.
Why taxes matter
- Government revenue. Funds public services.
- Inequality. Progressive taxes reduce.
- Behavior shaping. Pigouvian taxes.
- Public policy. Major lever.
- Personal finance. After-tax income.
- Business decisions. Investment, location.
- International competition. Tax havens, base erosion.
Common misconceptions
- Top marginal = effective. Average lower than top.
- Higher rate = more revenue. Laffer curve: not always.
- Corporate tax fully on companies. Often workers or consumers bear.
- Tax cuts pay for themselves. Rare; specific conditions.
- Just revenue. Behavior, equity matter.
- Wealthy pay no tax. Effective rates often high; legal avoidance reduces.
Frequently asked questions
What types of taxes exist?
Many. (1) Income tax: on earnings; progressive in most countries. (2) Payroll tax: for Social Security/Medicare; flat rate up to cap. (3) Sales tax / VAT: on purchases. (4) Property tax: on real estate. (5) Corporate tax: on company profits. (6) Capital gains: on investment income. (7) Estate tax: on inheritances. (8) Excise tax: on specific goods (gas, cigarettes, alcohol). Different mixes by country.
What's progressive vs regressive?
Progressive: higher earners pay higher rates. Income tax usually. Reduces inequality. Regressive: higher earners pay lower rates (proportional to income). Sales tax often regressive (poor spend higher % of income). Flat: same rate for all. Mixed system: progressive income + regressive sales = sometimes near-flat overall.
What's tax incidence?
Who actually bears the burden. Different from legal payer. Determined by elasticity. Inelastic side: bears more. (1) Cigarette tax: legally on consumers; mostly born by them (inelastic demand). (2) Corporate tax: legally on companies; debated who bears (workers, consumers, shareholders). (3) Property tax: long-run mostly born by landowners. Tax design: should consider economic incidence.
How does income tax work?
Marginal rate system. US (2024). 10%, 12%, 22%, 24%, 32%, 35%, 37%. Apply to brackets. First income at 10%, next at 12%, etc. Average rate: lower than highest marginal rate. Top marginal rate ≠ effective rate. Plus: deductions (mortgage interest, charity, state taxes), credits (child tax credit, EITC). Complex system.
What's a sales tax / VAT?
Sales tax: on retail sales; collected by retailer. US: state and local; varies. VAT (Value Added Tax): on each stage of production. Common in EU. Each business: charges VAT on sales, subtracts VAT paid on inputs. Result: tax on final consumption. Generally regressive: poor spend higher % of income. Exemptions (food, medicine) help.
What's the optimal tax theory?
Theory of efficient taxation. Mirrlees (Nobel 1996). Trade-off: revenue, equity, efficiency. Efficient taxes: minimize deadweight loss. Broad base, low rates: better. Tax goods with inelastic demand more (e.g., land). Taxes that don't distort behavior (lump-sum): efficient but unfair. Practical: balance multiple goals. Big debate in public economics.
What's the Laffer curve?
Relationship between tax rate and revenue. As rates rise, revenue rises until peak; then falls (as people work less, evade more). Inverted-U shape. Implies: tax cuts at high enough rates can raise revenue. Empirically: peak typically high (>50% for income tax). US current rates: probably below peak. "Tax cuts pay for themselves": rare and only at high rates.