The Effect of Inflation on the Income Elasticity of Taxes
This paper defines the relationship between the nominal (or money) income elasticity and the real income elasticity of a tax system. Under most circumstances, the real and the nominal income elasticities differ. This difference has not been recognized by economists who rely strictly on nominal elasticities as an indicator of revenue adequacy or tax burden, a practice which can be misleading, especially under conditions of general price inflation. The income tax, sales tax and property tax are analyzed briefly in terms of their elasticity features.
The effect of tax elasticity on government spending
Elasticity measures the extent to which a tax structure generates revenue in response to increases in taxpayer income without a change in statutory tax rates. While elasticity depends in part on propensities to engage in taxable activity, its main dependency across political units in the United States is on the progressivity of the income tax. States with highly progressive income taxes tend to have elastic tax structures. It has been proposed that greater elasticity in the tax structure generates a greater volume of public spending [3, 5, 12]. This proposal generally rests on the concept of 'fiscal illusion', the illusion being that if the legislature does not enact a statute raising tax rates, taxes have not increased. It follows that states with elastic tax structures experience greater increases in tax revenues without having to go through the throes of a tax increase, and those states will spend more. We admit to being supportive of the idea that elasticity drives spending. We also admit to the usual discomfort that economists feel when they lean on notions conflicting with the assumptions of 'rationality' that undergird the conventional utilitarian analysis. But, we proceed with the hope that there will be a reconciliation of this conflict. One could build a competing theory based on public choice notions to explain the hypothesis that elasticity breeds spending. Assuming that the median voter prevails, it is obvious that we could specify individual demand functions for public goods such that if cost allocation were made progressive to income, spending increases would result. But, there is difficulty in propping up such a notion in the face of Tiebout mobility [11 ]. Similarly, if we assumed that tax sharing arrangements were prescribed
Deliberative Democracy and the Resource Curse: A Nationwide Experiment in Tanzania
Oil and gas discoveries in developing countries are often associated with short-sighted economic policies and, in response, calls to insulate resource management from populist impulses. We report on a randomized experiment testing methods to overcome this apparent tension between sound resource governance and democratic politics. Soon after Tanzania’s discovery of major natural gas reserves, we invited a nationally representative sample of voters to an intensive public deliberation of policy options featuring nationally recognized experts and small-group discussions. Democratic deliberation reinforced the public’s strong preference for rapid spending of gas revenues, but also increased support for various prudential and economically orthodox measures, including independent oversight of gas revenues, limits on government borrowing, and selling gas abroad rather than subsidizing fuel at home. These effects were driven by deliberation per se, rather than a pure information treatment, and show no evidence of contamination by facilitatoror peer-effects in group deliberations. www.cgdev.org Justin Sandefur, Nancy Birdsall, James Fishkin, and Mujobu Moyo