Economics Study Set 20

Business

Quiz 29 :
Government Spending and Taxation.

Quiz 29 :
Government Spending and Taxation.

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How do taxes influence the efficiency of resource use? How much does it cost for the government to raise an additional dollar (or $1 billion) of tax revenue?
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Dead weight loss:
Dead weight loss is the decrease in the total surplus in an economy due to an inefficient level of production.
As taxes are the burden that is imposed by the government on consumption of goods and services, the tax will reduce the efficiency.
By imposing a tax, efficiency of a resource falls because taxes impose a burden on the society in the form of compliance costs and the deadweight losses. This reduces the consumer and producer surplus in the economy leading to a reduction in the efficiency of resources.
The cost of the additional tax revenue will be greater than the revenue transferred to the government. Taxes impose an additional burden on the economy as they eliminate productive exchanges. Deadweight loss occurs as the burden is imposed on the tax revenue transferred to the government.
Research indicates that these deadweight losses will add between 9% to 16% to the cost of taxation. That is a $1 tax paid will impose between $1.20 to $1.30 cost on the economy.

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During the past five decades, there has been a shift in the composition of the federal budget toward more spending on income transfers and health care and a smaller share for national defense. Does economics indicate that this change will help Americans achieve higher living standards? Discuss.
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This statement is actually false. Yes many economists would agree that government should provide these goods like health care, education etc. But the problematic part is that the claim that government can provide these for free of cost. Nothing is free of cost in this World. But since these goods are considered as merit goods hence government can produce subsidies for these goods for the benefit of the society.

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Because the structure of the personal income tax is progressive, a larger share of income is taxed at higher rates as real income increases. Therefore, economic growth automatically results in higher taxes unless offsetting legislative action is taken. Do you think this is an attractive feature of the current tax system? Why or why not?
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a. In the market place the usual method of rationing goods is the pricing. The usual process of corresponding incentivisation is as follows - whenever some good's price rises it is beneficial for the holder of that goods to sell it and whenever some good's price falls it is beneficial for someone who demands it to buy that good.
b. Grades rationing in Economics class or usually in any course happens on the basis of performance in the examination. Usually more one put labor to grasp the material and syllabus more she score in examination.
Now if rationing happen based on teacher's preference not depending on students' effort then there will not be any incentive for students to put hard work to grasp or complete the syllabus rather there would be incentive to become closer to the teacher.

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Compared with the situation before 1981, the marginal tax rates imposed on individuals and families with high incomes are now lower. What was the top marginal personal income tax rate in 1980? What is the top rate now? Are you in favor of or opposed to the lower marginal rates? Why?
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As the result of changes during the last two decades, the bottom half of income recipients now pay little or no personal income tax. Rather than paying taxes, many of them now receive payments back from the IRS as the result of the Earned Income Tax Credit and Child Tax Credit programs. Do you think the increase in the number of people who pay no taxes will affect the efficiency of the political process? Why or why not?
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How have the size and functions of government changed during the last two centuries? Did the framers of the U.S. Constitution seek to limit the size of the federal government? If so, how?
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Can democracy survive if a majority of the citizenry pay little or nothing in taxes while benefiting directly from a higher level of government spending? Why or why not? Discuss.
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