2. If you believe that a proportional consumption tax was the best tax, what are

ID: 2494459 • Letter: 2

Question

2. If you believe that a proportional consumption tax was the best tax, what are the various ways in which you could levy (collect) it? Might there be differences in administrative costs associated with levying such a tax in different ways?

3. 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 ever be desirable to impose a negative marginal tax rate on very- high- income individuals?

4. Under what circumstances will an increase in the progressivity of the tax schedule increase the degree of before tax inequality?

5. To what extent do you think that indifferences in views concerning how progressive our tax structure should be reflect differences in values, and to what extent do they reflect differences in judgments concerning the economic consequences of progressivity (deadweight loss, shifting)?

Explanation / Answer

Proportional consumption tax: the proportional tax is in contrast to a progressive tax, where tax payers pay tax based on income, higher income group pays high and lower income group pays low. A proportional tax applies the same tax rate across low-, middle- and high-income taxpayers. In this proportional tax the tax rate is fixed, with no change as the taxable base amount increases or decreases. Where the marginal tax rate is equal to the average tax rate.

There are various ways to Implementation of a consumption tax. Here we discussed which widely known options are

a. National Retail Sales Tax,

This tax imposed by government on the goods and series. A conventional sales tax is levied at the point of sale, collected by the retailer and passed on to the government. A national sales tax, if implemented, would replace the income tax. Retail businesses would collect the tax when consumers pay for goods and services. If the national sales tax were administered similarly to the current sales tax, then tax revenue could be collected without the help of the IRS; tax revenues could be handled by the Treasury Department. This tax would impact all United State residents, citizens and illegal aliens alike. Everyone who lives in the country would share in the responsibility of paying taxes, as all individuals consume products and services.

b. Value-Added Tax (Vat), and

This is also one of the consumption taxes. Here the value is added at a stage of production and at final level. The amount of value-added tax that the user pays is the cost of the product, less any of the costs of materials used in the product that have already been taxed.

c. Flat Tax.

A flat tax is a tax system that taxes income at a single fixed rate regardless of an individual's income level, meaning that all taxpayers pay the same tax rate on their income. For instance, if the rate were six percent, then someone making $20,000 pays a six percent tax on that amount; someone earning $500,000 also pays six percent tax. National sales tax is considered a tax on consumption. This tax is levied upon consumers at the point of sale for goods and services. Typically, the tax is calculated by applying a certain percentage rate to the taxable price of a sale. The national sales tax would function like a state sales tax; the tax would be an extra cost added to the retail price of products.

A common contribution is essential for the maintenance of the public forces and for the cost of administration. This should be equitably distributed among all the citizens in proportion to their means.

A regressive tax is imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. A regressive tax is a tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder.

The social welfare function is Utilitarian for people initially alivewhere is the value function in the first period of the transition induced by new tax system is the initial distribution of households in the stationary equilibrium under the status quo policy

Social welfare functions are conventionally used in the theory of public finance to represent different approaches or views to income distribution. 7 One of the most recognizable social welfare functions is the “utilitarian social welfare function” given by: W = F( U1, U2,……,Un), It is assumed there are n individuals in society, and Ui represents the utility of the ith individual. The general guidance for income redistribution in this general formulation is that income should be redistributed, for example, through tax and expenditures policies for as long as W increases. The true implications for actual income distribution depend on the specific form the social welfare function takes and the weights attached to each individual’s utility. For example, if we assume that W = U1 + U2+……+Un, the level of social welfare does not change if we redistribute income. All individuals count the same regardless how rich or poor they are. A slight modification of the social welfare functions allows us to attach different weights to individuals as below W = ?1U1 + ? 2U2+……+? nUn, so that social welfare increases when income is distributed toward individuals with higher weights. This is why the ? receive the name of social weights. One extreme example of social welfare function known as the “maximin” criterion of income distribution is given by W = minimum of( U1, U2,……,Un), where social welfare increases only when the welfare of the poorest individual increases. So in effect the weights attached to all individuals except the poorest individual are equal to zero.

In order to establish the incidence of taxes we need to compare the distribution of income that results form the presence of taxes with some initial benchmark distribution of income, or the counterfactual. One approach is to use a “differential incidence approach” by comparing the new results to a distribution of tax burdens that would have taken place if revenues had been collected in the same amount with a proportional income tax. The assumption is that a proportional income tax would be the most neutral tax alternative to finance the budget. However, truly the counterfactual would need to be the distribution of income that would have taken place in the absence of taxes as well as the behavioral responses to them. This is, of course, a tall order since we have never observed an economy without taxes. In practice, several compromises are made to arrive at the counterfactual. As we see below, general equilibrium approaches are better equipped to address this issue.

4. Under what circumstances will an increase in the progressivity of the tax schedule increase the degree of before tax inequality?

A progressive tax is a tax in which the tax rate increases as the taxable amount increases. The term "progressive" refers to the way the tax rate progresses from low to high, with the result that a taxpayer's average tax rate is less than the person's marginal tax rate. The term can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes are imposed in an attempt to reduce the tax incidence of people with a lower ability to pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay. The opposite of a progressive tax is a regressive tax, where the relative tax rate or burden decreases as an individual's ability to pay increases.

Underlying this tradeoff is the presumption that a higher level of tax progressivity reduces income inequality. However, the presence of tax evasion undermines this commonly held view of progressivity. To the extent that tax rates and evasion are positively related, it is possible that both efficiency and equity could be reduced as a result of increased progressivity. This possibility arises if progressivity has a differential effect on observed inequality in reported income vs. actual inequality in true income in the presence of tax evasion.

In economics, the excess burden of taxation, also known as the distortionary cost or deadweight loss of taxation, is one of the economic losses that society suffers as the result of taxes or subsidies. Economic theory posits that distortions change the amount and type of economic behavior from that which would occur in a free market without the tax. Excess burdens can be measured using the average cost of funds or the marginal cost of funds (MCF). Excess burdens were first discussed by Adam Smith. An equivalent kind of inefficiency can also be caused by subsidies (that are actually taxes with negative rates). Economic losses due to taxes were evaluated to be as low as 2.5 cents per dollar of revenue, and as high as 30 cents per dollar of revenue (on average), and even much higher at the margins.

The tax burden the hurt caused by taxes is not borne entirely by the people who write the checks to the Internal Revenue Service. To some extent many taxes are "shifted" to other members of society. For example, because highly progressive taxes discourage people from entering high-paying professions, salaries in these professions will be higher than otherwise. Therefore, the taxes paid by the upper-income taxpayers who do enter these professions overstate the true burden of taxation on them. Also burdened by these high taxes are the people who pay higher prices for the goods and services provided by the people with higher salaries.

Navigate

2. If you are not sure of the range of the current in a circuit you are about to

2. If you found a W. warhawkiensis plant with large purple flowers, how could yo

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.

2. If you believe that a proportional consumption tax was the best tax, what are

Question

Explanation / Answer

Related Questions

Navigate