Page 671 - Economics

CONFIRMING PAGES

PART EIGHT
580
Microeconomics of Government
will be selected using a majority paired-choice vote. Will of each of the following taxes, indicating in each case where
this option be the optimal size of the project from an eco- you think the tax incidence lies: ( a ) the Federal personal in-
nomic perspective? come tax; ( b ) a 4 percent state general sales tax; ( c ) a Federal
4. KEY QUESTION How does the problem of limited and bun- excise tax on automobile tires; ( d ) a municipal property tax
dled choice in the public sector relate to economic effi- on real estate; ( e ) the Federal corporate income tax.
ciency? Why are public bureaucracies alleged to be less 9. KEY QUESTION What is the incidence of an excise tax when
efficient than private enterprises? demand is highly inelastic? Elastic? What effect does the
5. Explain: “Politicians would make more rational economic deci- elasticity of supply have on the incidence of an excise tax?
sions if they weren’t running for reelection every few years.” What is the efficiency loss of a tax, and how does it relate to
elasticity of demand and supply?
6. Distinguish between the benefits-received and the
ability-to-pay principles of taxation. Which philosophy is 10. ADVANCED ANALYSIS Suppose the equation for the de-
more evident in our present tax structure? Justify your an- mand curve for some product X is P 8 .6 Q and the
swer. To which principle of taxation do you subscribe? supply curve is P 2 .4 Q. What are the equilibrium price
Why? and quantity? Now suppose an excise tax is imposed on X
such that the new supply equation is P 4 .4 Q. How
7. KEY QUESTION Suppose a tax is such that an individual
with an income of $10,000 pays $2000 of tax, a person with much tax revenue will this excise tax yield the government?
an income of $20,000 pays $3000 of tax, a person with an Graph the curves, and label the area of the graph that repre-
income of $30,000 pays $4000 of tax, and so forth. What is sents the tax collection “TC” and the area that represents
each person’s average tax rate? Is this tax regressive, propor- the efficiency loss of the tax “EL.” Briefly explain why area
tional, or progressive? EL is the efficiency loss of the tax but TC is not.
11. LAST WORD How do the concepts of pork-barrel politics
8. What is meant by a progressive tax? A regressive tax? A pro-
portional tax? Comment on the progressivity or regressivity and logrolling relate to the items listed in the Last Word?

Web-Based Questions

1. BUREAUCRACY AND INEFFICIENCY—THE POST OFFICE “1040 Instructions (Tax Tables)” for the latest tax year.
VERSUS UPS Some economists contend that public agen- Find the tax payment you would owe if you were a single
cies generally are less efficient than private businesses. taxpayer with a taxable income of (1) $23,360, (2) $46,200,
United Parcel Service (UPS) competes directly with the and (3) $85,010 in the taxable year. Compare the average
U.S. Postal Service for express mail and packages. As- tax rates (taxable income/tax payment) for the three levels
sume you need to send an express letter and a 3-pound of income. Next, suppose that you live in a state with a
package from your address to either New York City or Los 7 percent sales tax and that you spent 90 percent of your
Angeles. On the basis of their interactive rate and options taxable income in the year. How much total sales tax
calculators at www.ups.com and www.usps.com , which would you pay at each income level? Add the total sales
service is more competitive as to price and delivery? Does a tax to the income tax for each income level and compute
lower rate with greater delivery options mean greater new average tax rates based on the combined income tax
efficiency? Why or why not? and sales tax as a percentage of taxable income. Compare
2. CALCULATING TAXES AND DETERMINING AVERAGE the new percentages with the previous ones. What can
RATES The Internal Revenue Service provides current you conclude from the comparison? (We are assuming that
tax-rate tables online at www.irs.gov . Enter “Tax Tables” you take the standard deduction on your Federal income tax
in the search line for forms and publications and find form and thus do not claim a sales tax deduction.)

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