Questions and Answers of Public Finance A contemporary Application

How can depreciation allowances affect the size of the tax base for the corporate income tax? How can accelerated depreciation reduce a corporation’s tax burden? What problems are caused by
Why is the short-run impact of the corporate income tax on prices of corporate output so crucial in determining the final impact of the tax in the long run? Explain why a profit-maximizing
Explain why the corporate income tax causes resources to flow out of the corporate sector when the short-run effect of the tax is to reduce the after-tax return to capital invested in the corporate
Assuming a fixed aggregate supply of saving, how does the corporate income tax reduce efficiency according to the results of Harberger’s model? How will further losses in efficiency result when the
How could the current personal income tax be modified so that it becomes a consumption tax? What are the advantages of taxing consumption in this way?
Explain why many economists argue that an income tax penalizes savers but a consumption tax would not. In what sense can consumption be regarded as a better index of the ability to pay taxes than
Show how under an income tax the present value of the amount of tax paid over a person’s lifetime will vary with the difference in saving for two individuals who begin the life cycle at age 18 and
An income tax that taxes only labor income would be equivalent to a consumption tax. Do you agree?
How would loans be treated under a general tax on comprehensive consumption? What are some of the problems encountered in defining the tax base?
Why must the tax rate on a general tax on consumption exceed that of a general tax on income if the two are to raise the same revenue?
What is a VAT? How can it be administered without any need for a firm to calculate value added? Why is a general consumption-type VAT equivalent to a tax on comprehensive consumption?
Explain why the invoice method of collecting the VAT does not require firms to compute value added. How does the invoice method act to discourage tax evasion?
Explain why a comprehensive wealth tax is equivalent to a tax on the annual return to savings. If the annual return to holding wealth is 10 percent, calculate the tax rate on annual savings and
How is the tax base defined for a comprehensive wealth tax? What are some of the problems associated with measuring wealth? Why would inclusion of the assets of corporations and outstanding corporate
Who bears the incidence of a general wealth tax when the interest elasticity of supply of savings is zero? Why is the incidence most likely to be progressive?
How can a general wealth tax be shifted to workers and consumers when the aggregate supply of saving is not perfectly inelastic? What effect does the tax have on the work-leisure choice? What are the
Why is a national tax on real estate likely to be at least partially borne by owners of all forms of capital regardless of the use to which that capital is put?
Suppose the discount rate is 10 percent. Calculate the tax capitalization resulting from a property tax rate differential of 5 percent above the national average for an asset with a $5,000 annual
Under what circumstances will a property tax be only partially capitalized?
Nineteenth-century economist Henry George believed that a tax on land, rather than on buildings, would have no excess burden because it would not be a tax on one’s economic choices. Following such
If you rent an apartment, your landlord uses a portion of your rent to pay property tax. Recently, New York City imposed heavy increases in property tax rates. At the same time, average apartment
Explain why the equilibrium quantities of government services supplied by a central government under majority rule, with all citizens voting, will differ from local political equilibria for the
How many political jurisdictions do you reside in? List the government-provided services that you obtain from each of your jurisdictions. What kinds of taxes are levied in each jurisdiction to pay
Why does citizen mobility increase the desirability of decentralized decision making in relation to efficiency? What does Tiebout mean by “voting on your feet?” How does the Tiebout model explain
What are interjurisdictional externalities? What problems does their existence create for a federal system?
The governor’s office has forecast a sizable state budget deficit. Plans are being made to cut state spending and to increase state taxes. The budget office expects that higher tax rates will yield
Why are matching grants likely to be more effective in increasing local government spending than are equal-dollar nonmatching grants? Explain how matching grants can help achieve efficiency by
One consequence of the Tiebout model is that local communities have different per-capita expenditures on public parks and different per-student expenditures on public schools. Identify at least one
Make a rough estimate of how much you and your family pay in taxes each year. Compare this estimate with the value of services received from the government. Do you think government provides you with
How does the mechanism for distributing and rationing most government services differ from that for distributing goods through markets?
List some major political institutions and indicate how they translate desires into collective agreements.
What is a production-possibility curve? Show how such a curve can be used to explain how private goods and services must be sacrificed to obtain government goods and services.
As of 2009, many state governments were experiencing fiscal problems, and tax revenues were falling short of planned expenditures. What factors can influence state revenue collections and
What is the real cost of government expenditures? Think about your estimate of the taxes you pay and what you could have purchased with that money.
Discuss the trends in government expenditures and outlays as a percentage of GDP.
What major characteristics will distinguish a government service from a transfer payment? The level of state and federal transfer payments increases during recessions. Why does this spending increase
Why is Social Security expected to have financial difficulties in the coming decades? How might the program be changed to fix the future problem?
How are normative statements distinguished from positive statements? Look through a daily newspaper for articles on politics and make a list of statements regarding current issues; indicate which are
How does trading improve efficiency? Why are trades that apparently provide mutual gains to those involved not undertaken? Show how equating the total social benefit of a good with its total social
Suppose you have more books than you want but would like to have more sporting goods. Explain how your well-being would be affected if a law existed preventing the trading of books for sporting
Why might individuals support the status quo over policies that can be shown to improve efficiency? Examine your own views on issues relating to social policy and ask yourself whether you would
Relate the concept of efficiency to points on a utility-possibility curve.
Suppose a politician asks consultants to calculate the total social cost and the social benefit of the activities in a government agency. The politician discovers that total social benefits exceed
Define Pareto optimality. Use the definition of Pareto optimality to demonstrate that the market for buying and selling owner-occupied housing follows the requirements for Pareto optimality. Apply a
Suppose the marginal social cost of fighter aircraft each year exceeds their marginal social benefit. Are fighter aircraft being produced at an efficient level?
The marginal social benefit of college enrollments currently exceeds its marginal social cost. Use a graph to demonstrate the gain in efficiency that would result from an increase in college
The price of automobiles currently equals both the marginal social benefit and the marginal social cost at existing annual output. A tax is levied on the sale of cars. Assuming that the tax increases
Efficiency can correspond to more than one distribution of well-being. Can the efficiency criterion be used to rank one distribution over another?
Jury duty is compulsory service, and in most states jurors are paid less than the minimum wage. Low pay for jurors leads to lower court costs charged to parties in a lawsuit. How does the use of
Explain why externalities prevent the attainment of efficiency when goods are traded in competitive markets.
Why do prices fail to represent the opportunity costs of resources when externalities exist?
Suppose a positive externality is associated with college enrollment. Assume that college instruction is sold in a competitive market and that the marginal social cost of providing it increases with
What kinds of information must be gathered to internalize an externality?
A city can subsidize commuting via public transit by giving public funds to buses and subways. A city also subsidizes commuting by car by spending public funds to maintain roads and bridges. How are
Why do limits on pollution emissions fail to internalize the externality that generates the pollution?
Assume that the market for tradable emissions permits by power plants has been operating efficiently for several years. An engineering firm then invents a lower cost device for pollution abatement.
Under what conditions are externalities likely to be internalized without the necessity of government intervention?
Why might it be argued that the distinction between emitters and receptors of an externality involves an arbitrary judgment?
What criteria can be used to determine if a small number externality exists? Why is it undesirable to compensate receptors of external damage in cases where there are few emitters and many receptors?
In major cities, some residents do not own a car and only travel by subway. While a car commuter both causes and is delayed by traffic congestion, a subway rider’s commute time is unaffected.
Why does the definition of a pure public good imply that its benefits are not subject to congestion?
How does the condition for efficiency differ between pure public goods and pure private goods?
What problems are likely to arise if people try to supply public goods for themselves without cooperating and sharing costs?
In what sense does the demand curve for a pure public good differ from that of a pure private good?
How will shares in the finance of public goods vary among contributors in a model of voluntary cooperative supply of such goods?
Only 10% of viewers of public television make contributions to public television stations. Yet the Congress approves budgets that subsidize public television. Why would the typical voter/taxpayer
Give some examples of goods sold by governments in markets. Also, think of examples of partially public goods produced and distributed by private firms for profit.
Education can be defined as a private good, even when supplied by government. Explain what attributes of education make education definable as a private good.
What factors influence the costs of supplying such public goods as police protection and national defense? What might cause these costs to go up or down, and how would such change affect your taxes?
How does a person decide to vote on any issue that proposes to change the amount of public goods supplied by the government?
What is logrolling? Under what conditions is logrolling likely to emerge? How can logrolling prevent the attainment of efficiency?
Show how an increase in the average cost of supplying a pure public good will reduce the output resulting from simple majority rule. Is the median voter always the same person? Show how a change in
Explain in your own words the inherent problem of government waste identified by William Niskanen. If this spending is for services used by the public, why would Niskanen nevertheless label it
Americans pay higher grocery prices due to higher tariffs on imported sugar. The only supporters of sugar tariffs are U.S. sugar growers and other U.S.-based makers of sweetening products. Why do
What are the steps necessary to implement a program budgeting system? How does program budgeting differ from line budgeting?
What information is required to find out whether a given combination of programs designed to achieve the same objective is cost effective?
Explain how program budgeting systems seek to improve efficiency within government. How are decisions made under program budgeting similar to those made by profit-maximizing business firms?
Explain how the cost-effective mix of government programs to provide national security can be determined. How does approval of programs that are not cost effective prevent the attainment of
Why would counting retail sales that result from increased farmer income resulting from an irrigation project overstate the benefits of the project? When should increases in land values that result
Suppose investment income is taxed at a higher rate than the interest that consumers earn on their savings. Explain why the social opportunity cost of funds used for government projects will depend
How does the social rate of discount used affect the number of projects that can be approved and their ranking in cost-benefit analysis?
Compensating differentials are higher salaries paid for jobs with greater danger or disutility. A more dangerous job must pay a compensating differential or no worker would be willing to accept it.A
Suppose more than the efficient number of hydroelectric power projects have already been approved. Show why a properly executed cost-benefit analysis would result in a benefit-cost ratio that is less
Suppose a new project to expand air traffic control facilities will allow reductions in the cost of air travel and increases in the volume of travel. How would you measure the benefits of the new
What are some of the problems involved in measuring the value of human life? Explain why saying that each life is priceless is likely to result in more than the efficient amount of investment in
Cost-benefit analysis often uses a discount rate (interest rate) to evaluate the merits of public policy proposals:a. Identify one reason for using a discount rate that is equal to the prime rate
Before a new public works project is approved, government will conduct a cost-benefit analysis. Before a new business venture is launched, a private firm will conduct a feasibility study to estimate
List the major programs of government assistance to the poor in the United States. What percentage of the population is poor? Do all the poor qualify for government assistance programs?
What is a means test? How does it differ from a status test? What are entitlement programs, and how are the expenditures under these programs related to means tests and status tests?
Suppose the government gave away heating oil free to eligible low-income citizens. Use a graphic analysis to show the excess burden in the market for this good. Under what circumstances will the
It is possible that a recipient of the supplementary Nutrition Assistance Program (SNAP) will not at all increase total monthly spending on food. Rather, a recipient might use SNAP benefits as a
What are the possible collective benefits of government assistance to the poor? Why are in-kind benefits to the poor more prevalent than cash benefits?
Draw a diagram similar to the work-leisure diagram of Figure 7.8.a. Create a budget line for a person who receives a Negative Income Tax (NIT), at an initial low level of income. Label this line
Explain why in many cases in-kind transfers to the poor are likely to be equivalent to cash transfers in their effects.
Explain how cash and in-kind transfer programs can reduce the incentive to work by recipients.
Suppose a person will receive $50 per day as a transfer if he does not work at all. This transfer is reduced by 60 cents for each $1 of earned income. How much daily earned income will reduce the
Has poverty in the United States been eliminated as a result of transfers to the poor? What are some of the problems involved in measuring poverty?
Explain why the negative income tax plan is likely to be more expensive than the current system of assistance to the poor. What are the advantages of wage rate subsidies?
Define the welfare trap. How have traditional welfare programs (especially before 1996) been responsible for promoting the welfare trap? The federal welfare reforms of 1996 (i.e. the creation of
How do Social Security benefits increase the incomes of low-income workers relative to upper-income workers? Discuss the distinction between the net and gross replacement rates for workers. What does

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