1. Illustrate the deadweight loss for a unit sales tax when the supply curve is perfectly elastic and the demand curve is downward sloping.

2. For the U.S. income tax, what is the net price of giving $100 to charity for a person who itemizes deductions on her income tax return and has taxable income that puts her in the 25% marginal tax bracket?

3. Evaluate the following statement: The more inelastic the supply of labor, the more likely it is that incidence of employers’ share of the payroll tax falls on workers.

4. An article in the April 6th-12th, 2013 issue of The Economist magazine discusses subsidies to alternative energies or renewables (“Bonfire of the Subsidies” on page 14). The article concludes as follows:
“Moving to an ever-lower-carbon economy at a deliberate pace is a good idea. The best way to do it is to set a carbon tax (on fuels that emit carbon) and let the market decide the cheapest, cleanest fuel alternative, while we search for future alternative (energy).” The argument is that a tax on high carbon fuels is better than a subsidy to energy alternatives, especially when the alternative energy sources are uncertain and under development. Evaluate the conclusion using what you know about dead weight losses of taxes, as well as externalities caused by producing carbon and your knowledge of economics.

5. Most economists agree that the taxes should be designed with broad bases and relatively low tax rates. Why do they think that low tax rates and comprehensive tax bases lead to efficient taxation?

6. These same economists to whom we refer in question seven argue that to address equity in the fiscal system, one should remove low-income individuals, households, and families from the personal income tax and use public expenditures to accomplish society’s goals for redistribution of resources towards low-income individuals, households, and families. What tax principles favor this view?

7. In Tax by Design, James Mirrlees and his collaborators make the following statement: The fiscal system (tax and expenditures) can be progressive even when each tax is not progressive. In fact most of the progressivity in a fiscal system comes from the expenditure side of the budget and to a lesser extent from the tax side. Explain what they mean in the context of what you know about tax burdens and expenditures in the United States.

8. Explain the following statement: When a person’s wages increase, an income effect will mean that a person will likely work fewer hours. Show the income effect on a graph.

9. Explain the following statement: When a person’s wages decrease, a substitution effect will induce a person to work fewer hours. Show the substitution effect on a graph.

10. What is the supply elasticity of labor for a primary worker in the United States? Given this elasticity, explain the incidence of a payroll tax levied on employers.

11. Suppose the labor supply elasticity for secondary workers is 1.0 in the United States. Will the economic incidence of the payroll tax on employers fall to a greater or lesser extent on secondary workers when compared to the incidence of the same tax on primary workers? Explain using a graph.

12. Does the U.S. income tax code levy taxes on nominal or real returns to savings and to capital gains? Explain how taxing real gains and returns as opposed to taxing nominal gains returns might affect incentives to save and invest.

13. Explain the main features of the Earned Income Tax Credit (EITC)? Do the income and substitution effects associated with the program’s design always lead a person to work more? Why?

14. Why has the EITC had strong bipartisan support in Congress for many years?

15. The EITC increases the earnings of low-income workers. Another way to raise the earnings or low-income workers would be to increase the minimum wages of full-time workers.
Which policy would employers favor and why?
Which policy (EITC or minimum wage) targets families with children and working-age adults?
Which policy might taxpayers favor, if raising the minimum wage was accompanied by a reduction in the EITC and less tax revenue forgone?

16. A number of researchers have studied the effects that the EITC has on motivating more people to work (extensive margin) and on the hours worked among low-income recipients. The research results consistently find that the EITC increases labor force participation among those who previously did not work and does not discourage hours worked among those already in the workforce. Are these findings consistent with what might be expected by the theory on how the EITC might affect labor force participation and the number of hours worked.

17. Using a graph of a two-period model, show the income and substitution effects that might lead to more current consumption and less saving, if interest rates increase from 4% to 8%. If the increase in the interest rate led to less saving in period one, would the income or substitution effect be the dominant force?

18. The savings rate in the United States is low compared to other developed countries. Some economists argue that the U.S. tax code, financial aid for college tuition, subsidized public colleges, and the prospect of receiving social security all act to discourage savings. In what ways does the U.S. tax code provide a disincentive to save? Name two reasons. (These could involve how the code treats housing purchases and the returns to saving.)

19. Corporations have according to some estimates as much as $2.0 trillion overseas. Under the current corporate income tax rules, amount of income overseas brought back to the United States (repatriation) to the U.S., that sum will be taxed at a 35% corporate tax rate – with tax credits granted for the taxes paid to other governments. This practice is generally viewed as discouraging repatriation of overseas earnings to the United States.
Former Senator Max Baucus – now ambassador to Japan - has written a tax bill to tax all the corporate income held overseas immediately at 20%, and corporations could pay the tax due over an eight-year period.
For future profits, Baucus has proposed reducing the corporate rate from 35 percent to 30 percent. And earnings of foreign subsidiaries of U.S. corporations due to sales in the U.S. would be taxed immediately. For earnings of U.S. foreign subsidiaries due to overseas sales, 60 percent would be taxed immediately with credits for foreign taxes paid on those same earnings.
a. If corporations believed that future tax reform would reduce tax rates below 30%, but tax all foreign earnings, would they object or favor the Baucus proposal? How would you analyze this question?
b. President Obama has offered a tax reform proposal similar to Senator Baucus except President Obama wants to use the new revenue raised to finance infrastructure in the U.S. What objections might the U.S. Congress have to President Obama’s bill?

1. Illustrate the deadweight loss for a unit sales tax when the sup...