The federal government raises most of its revenue by direct taxes. State and loc

Question

The federal government raises most of its revenue by direct taxes. State and local governments raise most of their tax revenues by indirect taxes. The concepts of equitable taxation occasionally conflict. The burden of a tax is the amount of money an individual would have to be given to be as well off with the tax as without it. Excess burden arises whenever a tax induces some individuals or firms to change their behavior. When individuals change their behavior on account of a tax, they often shift the burden of the tax onto someone else. In certain instances, the manner in which it is shared depends on the elasticities of supply and demand. Answer the following questions to explain how taxation and resource allocation impact economic growth. Using the following income tax table, compute the marginal and average tax rates: Is the tax progressive, proportional, or regressive? Suppose the supply and demand schedules for cigarettes are as follow: What is the equilibrium price? What is the equilibrium quantity? Now, the government levies a $1.25 per carton excise tax on cigarettes. What is the new equilibrium price paid by consumers? What is the new equilibrium price received by producers? What is the new equilibrium quantity? Explain why it makes no difference whether Congress levies the $1.25 tax on the consumer or the producer? 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? Will there be any excess burden from this tax? Why? Who bears this excess burden?

Explanation / Answer

average tax rate:

total income- 140000

total tax-11400

avg tax rate- 11400/140000= 8.14%

Marginal tax rates- (10%+9%+8%+7%)/4

= 8.5%

Equilibrium price- $4 Equilibrium quantity- 240

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