Questions and Answers of Economics Of The Public Sector

If individuals are risk averse, why do they care more about large losses-that is, why are they willing to pay a larger amount in excess of the actuarial value of the losses for insurance ? What does
Consider John, a 68-year-old individual facing a 39.6 percent marginal tax rate, with no wage income. Assume that if he earns a dollar, he loses 50 cents in Social Security benefits, and that 85
Discuss how your views concerning the tax treatment of children might be affected by whether you(a) Lived in a highly congested country or in an underpopulated country;(b) Viewed children as a
With a progressive tax structure, it makes a great deal of difference whether husbands' and wives' incomes are added together and taxed, or taxed separately. Discuss some of the equity and efficiency
Does utilitarianism necessarily imply that tax structures should be progressive?
Consider an individual who has lost a leg but, with a new artificial leg, has the same earning power as before. How should his or her taxes differ from a similar individual who has not lost a leg:(a)
The government has passed a number of pieces of legislation aimed at ensuring that firms do not take advantage of consumers' limited information. What might be meant by a "truth in taxation" law?
"Because the needs, other than medical, of the aged are typically not as great as those of younger individuals who have children to support, if the government provides free medical care to the aged,
Suppose that the labor supply of married women is very sensitive to the after-tax wage (that is, it is very elastic), whereas the labor supply of men is not. The government proposes to reduce the tax
Consider a state debating how to finance emergency road and bridge improvements. Among the possibilities are increased fees on drivers' licenses, a personal property tax on motor vehicles, a tax on
Issues of efficiency and fairness often get intertwined in complex ways. Use the perspectives on the principles of taxation provided in the text to discuss the appropriateness of:a. Taxes on
Consider a mineral that is in fixed supply, QS = 4. The demand for the mineral is given by QD = 10 - 2p, where p is the price per pound and QD is the quantity demanded. The government imposes a tax
Consider a small town in which workers are highly mobile (i.e., they can be induced to leave the town if opportunities elsewhere improve slightly). What do you think the incidence of a tax on wages
It is frequently asserted that taxes on cigarettes and beer are regressive, because poor individuals spend a larger fraction of their income on such items than do better-off individuals. How would
It is often asserted that gasoline taxes used to finance highway construction and maintenance are fair because they make users of roads pay for them. Who do you think bears the burden of such taxes?
If you believed that a proportional consumption tax was the best tax, what are various ways in which you could levy it? Might there be differences in administrative costs associated with levying such
In what ways may the actual incidence of a government expenditure program differ from the legislated intent? Why might the effects be different in the short run than in the long run? Illustrate with
If savings do not respond to changes in the interest rate, does it mean that there is no deadweight loss associated with the taxation of interest?
What is the deadweight loss from the mineral tax in Chapter 18, problem 1? What is the relationship between deadweight loss and supply curves? Relate this to the discussion of lump-sum taxes.Data
Taxes and government expenditure programs affect a variety of other aspects of household behavior. Some economists, for instance, argue that they affect birth rates. What provisions of the tax system
Instead of representing the individual's decisions as a choice between consumption and leisure, they could be represented in terms of a choice between consumption and work. Draw the indifference
Compare the effects of a wage tax and a lumpsum tax raising the same revenue. In particular, show that the individual's utility is higher with the lump-sum tax than with the income tax.
Compare the effects of a proportional income tax and a progressive flat-rate income tax; that is, one in which there is a lump-sum grant from the government of, say, $3000, and then a constant
Prior to 1981, the government imposed only a 67 percent (instead of a 100 percent) marginal tax rate on income earned by a mother receiving AFDC. Draw the budget constraint before 1981 and after
Describe the income and substitution effects of an increase in the interest rate for a borrower. What does this imply for the effect of eliminating tax deductibility of interest payments?
What would be the effect of a switch to taxing individuals on the basis of their own income (rather than family income) on labor force participation of wives?
In the text, we explained what happened to equilibrium investment in an open capital market, when a tax was imposed on the returns to capital received by Americans. Analyze what happens if a tax is
The text discussed the problems and distortions posed by inflation. In the late 1990s, the possibility of deflation has loomed large; some countries have actually seen falling prices. Describe the
Explain why the EITC may actually lower total work eff ort of the poor even if it increases labor force participation.
It is difficult to ascertain precisely the decline in the value of most assets as they grow older. An exception is automobiles. Assume that a new car costs $5000; that its value at the end of one
In the debate concerning repeal of the provision allowing capital gains on assets passed on to one's heirs to escape taxation, some have reasoned that death is not voluntary, and therefore one should
Assume there are two "states of the world": in the good state, a risky asset yields a high return, whereas in the bad state, it yields a loss; the safe asset yields a zero return in both. Let Cg
Explain why it might be desirable to have a regressive tax structure, even if the social welfare function is utilitarian, when general equilibrium effects of taxes are taken into account. Would it
If you believed that those who were more productive in earning income also had a higher marginal utility of income (they were more efficient in consumption), what would that imply for the design of
Under what circumstances will an increase in the progressivity of the tax schedule increase the degree of before-tax inequality?
To what extent do you think that differences in views concerning how progressive our tax structure should be reflect differences in values, and to what extent do they reflect differences in judgments
One argument sometimes made in favor of the use of commodity taxation rather than income taxation is that people do not accurately perceive the amount they pay in commodity taxes. They will object
Supporters of accelerated depreciation in 1981 acknowledged that it favored heavy industry ("smokestack America") but argued that this was desirable. Why do economists tend to look askance at such
The government has tried to encourage savings by allowing individuals to save a limited amount for their retirement, without facing taxes on interest. Assume individuals can put, say, $2000 a year in
For each provision of the tax code listed below, which provides the best explanation: incentives, horizontal equity, vertical equity, administrative reasons, or special interest groups?a.
Discuss the arguments for and against using a tax credit rather than a deduction for medical expenses, charitable contributions, and child care expenses.
If you were asked to write the regulations concerning the deductibility of business expenses, how would you treat the following items, and why? Discuss the inequities and in efficiencies associated
Under the old tax law, money that scientists received from winning the Nobel Prize (or similar prizes) was not taxable. Now it is. Which treatment do you think is appropriate? Under both the old and
Consider a divorced individual who earns $26,000, has two children, and pays $4800 in child care expenses, $2000 in mortgage interest payments, and $4500 in medical expenses. Medical expenses in
Explain why federal tuition tax credits might lead states to increase the tuition they charge. Many states currently charge a tuition in state community colleges that is substantially below $2500,
In the debate over the tuition tax credit, one administration economist pointed out that in Georgia, which had provided these scholarships for its students, tuition had not increased after the credit
Discuss some of the controversies concerning who bears the burden of the corporation income tax. To what extent are differences in views accounted for by differences in assumptions concerning the
Is it possible for(a) The price of output of the corporate sector to rise by more than the tax revenues collected (per unit of output)?(b) The after-tax rate of return in the corporate sector to
Discuss the problems that arise when the corporation tax rate exceeds the highest personal income tax rates by a substantial amount.
Many firms pay their top executives with stock options, which give them the right to purchase shares in the company at a fixed price. When the firm does well, the value of the stocks increases, and
There have been proposals to allow firms interest on the losses they carry forward on their tax returns from one year to the next. That is, if a fi rm has a loss this year of $100,000, and the
Why do economists place so much emphasis on the difference between average taxes and marginal tax rates? Under what circumstances might these two differ significantly? Are there any circumstances in
Compare the taxes an individual would pay if he or she had a million dollars to invest in a machine that lasts one period only, yielding a gross return of $1.2 million, if the individual incorporates
Compare the present discounted value of taxes an individual who is the sole owner of a corporation that has $1 million in profits would pay under the following two scenarios:(a) The individual pays
A tax avoidance device that became popular in the late 1970s and early 1980s was the zero coupon bond. This was a bond that paid no interest. When the interest rate was 7 percent, a ten-year bond
Another popularly used tax avoidance device before 1981 was a straddle, in which an individual would sign one contract to buy a commodity (like wheat) at some future date and another contract to sell
Describe the tax savings for an individual in the 28 percent marginal tax bracket who owns a business with $10,000 in "profits" if the individual incorporates, giving his or her child a 50 percent
Citizen groups that monitor taxes paid by different corporations often complain about the low average tax rates that some corporations, especially those engaged in extensive leasing, pay. Is this
Some have argued that leasing agreements among firms with different tax situations may enhance economic efficiency. Explain.
Who benefits from the fact that state and municipal bonds are tax-exempt-the buyer of the bond, or the municipality that issues them?a. Assume that there are so many individuals in the top income
Explain how an individual can engage in tax arbitrage by borrowing:(a) To put money into an IRA;(b) To buy a tax-exempt bond.
Insurance policies often are a combination of a savings program and life insurance. The individual pays the company, say, $1000 a year; $100 of that goes to cover the risk of his or her dying during
There is a widespread view that a consumption tax would hurt the poor. Is this necessarily the case?
The adoption of a consumption tax would have a significant effect on the market value of certain assets. Which assets are likely to decrease in value? Which are likely to increase in value? Should
There is a widespread view that the appropriate basis for taxation is an individual's lifetime consumption (or lifetime income). Discuss the inequities and inefficiencies that would arise from a
Many economists and politicians have argued that moving from an income tax to a consumption tax would be unfair unless a wealth tax or an inheritance tax were enacted at the same time. Explain the
Explain why the repeal of the investment tax credit might have increased the value of existing capital goods.
Assume that contributions to an IRA account in excess of 10 percent of income are tax deductible. Use a two-period diagram to show the budget constraint. Explain why this form of IRA account is more
Assume that the supply of oil is inelastic. What is the effect of a tax by all countries on oil? Does it reduce oil consumption? Assume that only Switzerland imposes a tax on oil. What happens to
Consider a two-period model in which oil (still in inelastic supply) can be used in either this period or the next period. In equilibrium, the price in the next period must be higher than the price
Discuss the advantages and disadvantages of state versus national determination of eligibility standards and benefits for food stamps, Medicaid, unemployment insurance, Temporary Assistance for Needy
In President Reagan's State of the Union message in 1982, he proposed a trade with the states:in return for their taking over responsibility for the full costs of food stamps and Aid to Families with
If the income elasticity of demand for education is 1, what will be the effect on expenditures on education of a small block grant of $100,000 if the community currently spends 5 percent of its total
Many matching grant programs specify that the federal government matches, on a dollar-for-dollar basis, local expenditures up to some particular maximum. Draw the budget constraint between private
What would you expect to be the effects on spending on education if the federal income tax deduction for state and local taxes were eliminated? Show diagrammatically why you might expect such a
Consider a community in which everyone is at the 36 percent marginal tax bracket. By how much would educational expenditures be reduced by the elimination of the tax deductibility of state and local
On the basis of the discussions in Chapters 6 and 10, discuss the relative merits of regulation versus matching grants as devices to elicit desired behavior on the part of state and local governments.
Recall from Chapter 9 the median voter theory. Consider a state that imposed a proportional income tax on everyone, but assume that the median voter did not itemize his or her deductions, so this
The tax reform of 1986 eliminated tax deductibility of state sales taxes, but retained it for state income taxes. What implications should this have had for how states raised revenues? In fact, the
Concern about fungibility of funds-of states not using money in the way intended-has led Congress in some instances to impose maintenance-of-effort requirements. Thus, in the 1996 welfare reform, to
In the past, the federal government provided general revenue sharing. The argument for general revenue sharing was that the federal government was in a better position to collect tax revenues. States
Explain why the property tax may lead to lower expenditures on capital (buildings) per unit of land.
Many firms have employees, plants, and sales in more than one state. In imposing state corporation income taxes, states use a rule for allocating a fraction of a firm's total profi ts to their state.
Many of the issues of state and local taxation are similar to issues that arise in international contexts. Many countries, for instance, have imposed taxes on capital owned by foreigners. Discuss the
Many cities have passed rent control legislation. Discuss carefully who benefits and loses from such legislation, in the short run and in the long run. Discuss the political economy of such
Henry George, a famous nineteenth-century American economist, proposed that only land (not buildings) be taxed. Would this be unfair to landowners? Would it distort resource allocations, making land
Who are the main beneficiaries of tax-exempt industrial development bonds (which enable communities to borrow funds to re-lend to firms constructing new plants within the city):a. Workers in the
Who benefi ted from the construction of the subway system in Washington, DC:a. Owners of land near the subway line at the time the route was announced?b. Owners of land near the subway line at the
In 1993, a major dispute broke out between California and the United Kingdom involving taxation of the income of Barclays Bank, one of the major British banks. California imposed a tax that allocated
In an open economy, there are three sources of funds to finance investment: private savings (Sp), government savings (the difference between government revenues and expenditures, Sg ), and foreign
True or false: “Government borrowing can transfer resources from future generations to the present, but it cannot affect the overall wealth of the country.” Discuss.
In a closed economy, private savings plus government savings must equal investment:a. Draw a savings-investment diagram to show the effect of an increased budget deficit.b. Assume that the increased
Consider a small open economy with a perfectly elastic supply of savings at interest rate r*, which is below the interest rate that would have prevailed in the economy if it could not have borrowed,
The real value of the debt (in 1995 dollars) in 1995 was $3.6 trillion and in 1980 was $1.3 trillion. Assume that 50 percent of this buildup in the debt would have gone into investment, so the
One proposal to contain the deficits is a balanced budget amendment to the Constitution, that would require the government to maintain a balanced budget every year.a. Explain why, if the economy goes
Should expenditures on health care for children be considered an “investment” in a capital budget? What other expenditures might legitimately be classified as “investment”?
Assume the government sells some of the land it currently rents out for grazing. Should the revenues received be counted as reducing the deficit? How would the transaction be treated under a capital
Why does the way government achieves deficit reduction make a difference for economic growth?a. Assuming that the government raises taxes on interest income, what is the total impact on national
Throughout the text, we have emphasized how different government actions affect various groups in the population differently.a. Assume the government is considering whether to finance a war by
"If there are groups in the population who differ in their labor supply elasticity, they should be taxed at different rates." Justify this in terms of the theory of optimal taxation, and discuss its

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