Economics Study Set 17

Business

Quiz 18 :

Taxation and Resource Allocation

Quiz 18 :

Taxation and Resource Allocation

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"Americans are overtaxed. The federal government should continue cutting taxes." Comment.
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Tax rates in the United States are relatively higher. Higher taxes lead to reduce the consumption of goods and services. Consumption is a component of aggregate demand.
Aggregate demand falls due to decline in the consumption expenditure. Thus, federal government should continue cutting taxes.
Higher payroll taxes affect the willingness to work in the United States. People have to sacrifice larger portion of their income due to higher taxes. Reduction in the taxes is beneficial to stimulate the economic growth.

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Which concept of tax equity, if any, seems to be served by each of the following a. The progressive income tax b. The excise tax on cigarettes c. The gasoline tax
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(a) The progressive tax system serves the vertical utility concept. In terms of progressive tax system, the average tax rate increases as income increases. Vertical utility concept reflects that the people should be taxed according to their level of income.
Higher taxes are imposed on the higher income group people and relatively lower taxes are imposed on the lower income group people.
(b) The excise taxes on cigarette serves the concept of horizontal equity. The people who consume cigarette are supposed to pay taxes on it. Higher taxes are included in the price cigarette. Thus, there is no income discrimination while imposing taxes on cigarette.
(c) The gasoline tax serves the concept of horizontal equity. All the people who use gasoline are supposed to pay taxes. Income level of consumers is not considered while determining the tax rate.

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Soon after taking office in 2001, President Bush proposed a series of large tax cuts, including upper bracket rates and repeal of the estate tax. Critics argued that these tax cuts were excessive in magnitude and regressive in their distributional impact. Why did they say that Do you agree
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Critics have argued that reduction in taxes were regressive because the proportionate gains to poor people were small. Rich people have benefited more from the tax cuts.
Reduction in taxes were excessive in magnitude because it has reduced the distributional befits to poor. Normally, taxes are used to redistribute the income from rich to poor.
One would agree with the critics because tax cuts lead to reduce the government revenue. Reduction in the government might affect the public services which are usually provided to middle-class and poor people.

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The country of Taxmania produces only two commodities: rice and caviar. The poor spend all their income on rice, whereas the rich purchase both goods. Both demand for and supply of rice are quite inelastic. In the caviar market, both supply and demand are quite elastic. Which good would be heavily taxed if Taxmanians cared mostly about efficiency What if they cared mostly about vertical equity
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Use the example of Mr. Figg (see the box, "The American Way of Tax" on page 390) to explain the concepts of efficient taxes and excess burden.
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Now suppose the supply schedule is instead as follows: img a. What are the equilibrium price and equilibrium quantity in the absence of a tax b. What are the equilibrium price and equilibrium quantity in the presence of a $1.25 per carton excise tax c. Explain why your answer to part b differs from your answer to part b of the previous question, and relate this difference to the discussion of the incidence of an excise tax in this chapter.
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Use the criteria of equity and efficiency in taxation to evaluate the idea of taxing capital gains at a lower rate than other sources of income.
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Discuss President Reagan's statement on taxes quoted on the first page of this chapter. Do you agree with him
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Think of some tax that you personally pay. What steps have you taken or could you take to reduce your tax payments Is there an excess burden on you Why or why not
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Using the following hypothetical income-tax table, compute the marginal and average tax rates. Is the tax progressive, proportional, or regressive img
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Suppose the supply-and-demand schedules for cigarettes are as follows: img a. What are the equilibrium price and equilibrium quantity b. Now the government levies a $1.25 per carton excise tax on cigarettes. What are the new equilibrium price paid by consumers, the price received by producers, and the quantity c. Explain why it makes no difference whether Congress levies the $1.25 tax on the consumer or the producer. (Relate your answer to the discussion of the payroll tax in the text.) d. Suppose the tax is levied on the producers. How much of the tax are producers able to shift onto consumers Explain how they manage to do so. e. Will there be any excess burden from this tax Why Who bears this excess burden f. By how much has cigarette consumption declined on account of the tax Why might the government be happy about this outcome, despite the excess burden
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