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Under the benefit theory, tax levels are automatically determined, because taxpayers pay proportionately for the government benefits they receive. In other words, the individuals who benefit the most from public services pay the most taxes. Here, two models adopting the benefit approach are discussed: the Lindal model and the Bowen model.
Moreover, the sale does not occur, so the government never collects the revenue that was the whole reason for the distortion. This is the deadweight loss—the government has not merely taken a cut of the benefits from the exchange, it has destroyed those benefits for all three. [7] These are the results optimal tax theorists seek to avoid.
It would therefore be advantageous for her to export wine in exchange for cloth.” [3] Ricardo's theory demonstrates that a country, when choosing between two goods to produce and trade, could still achieve an advantage by focusing on the good requiring fewer resources to produce, even if the country does not have an absolute advantage in that ...
The modern literature on optimal labour income taxation largely follows from James Mirrlees' "Exploration in the Theory of Optimum Income Taxation". [1] The approach is based on asymmetric information, as the government is assumed to be unable to observe the number of hours people work or how productive they are, but can observe individuals' incomes.
Tax choice, on the other hand, would allow taxpayers to indicate their preferences with their individual taxes. Wallace E. Oates wrote: "In the Tiebout model , for example, there is costless mobility; individuals seek out a jurisdiction that provides exactly the level of output of the public good that they wish to consume.
If the tax rates are too high, discouraging labor and investment, a reduction in tax rates may in fact lead to an increase in government tax revenues, because it will encourage the entities to work and invest. [8] As the picture shows, the Laffer curve tells us that the government's tax revenue is zero for tax rates 0% and 100%.
Bill Gates said his ideal tax system would slash his net worth by 62% or about $100 billion, but still reward entrepreneurs.
In its use for assessing the efficiency of taxes and appraising fiscal policy, the benefit approach was initially developed by Knut Wicksell (1896) and Erik Lindahl (1919), two economists of the Stockholm School. [2] Wicksell's near-unanimity formulation of the principle was premised on a just income distribution.