- •Chapter 12
- •4.Describe in detail the benefits principle of taxation (with examples). Explain why the benefits principle may not be equitable (or efficient) for some of the roles government plays.
- •5.Describe in detail the ability-to-pay principle of taxation. Use an example to demonstrate the difference between horizontal and vertical equity.
- •6.Answer the question “Who pays the corporate income tax?” according to the Case Study. Are corporate income taxes truly paid by the corporations? who pays the corporate income tax?
- •7.Answer the question “Should Income or Consumption be Taxed” by thoroughly analysing the Case Study.
- •8.There are some Costs of Taxes to taxpayers. Carefully explain in detail with examples “Deadweight Loss” and “Administrative Burden
- •9.Demonstrate your observation of the Case study about “Horizoltal Equity and Marriage Tax”.
- •Chapter 13
- •What are opportunity costs? How do explicit and implicit costs relate to opportunity costs? Explain the role of opportunity costs in differentiating between economic profits and accounting profits.
- •Explain in detail all cost curves (why their shapes so): (atc, avc, afc & mc) and then show all of them on the graph.
- •Explain the shapes of Marginal cost and Average total cost (why mc rising & atc u-shaped) and then explain the relationship between them (mc & atc). Prove your answer on the graph as well.
- •Monopoly resources
- •Profit maximization
- •Monopoly drugs versus generic drugs
- •Price discrimination
- •Examples of price discrimination
9.Demonstrate your observation of the Case study about “Horizoltal Equity and Marriage Tax”.
HORIZONTAL EQUITY AND THE MARRIAGE TAX
The marriage provides an important example of how difficult it is to achieve horizontal equity in practice. Consider two couples who are exactly the same except that one couple is married and the other couple is not. In U.S. income tax code is that these two couples pay different taxes. The reason that marriage affects the tax liability of a couple is that the tax law suppose a married couple as a single taxpayer. When a man and woman get married, they stop paying taxes as individuals and start paying taxes as a family. If the man and woman have similar incomes, their total tax liability rises when they get married. To see how this “marriage tax” works, consider the following example of a progressive income tax. Suppose that the government taxes 25 percent of all income above $10,000. Income below $10,000 is excluded from taxation. Let’s see how this system treats two different couples.
Consider first Sam and Sally. Sam is a struggling poet and earns no income, whereas Sally is a lawyer and earns $100,000 a year. Before getting married, Sam pays no tax. Sally pays 25 percent of $90,000 ($100,000 minus the $10,000 exclusion),
which is $22,500. After getting married, their tax bill is the same. In this case, the income tax neither encourages nor discourages marriage.
Now consider John and Joan, two college professors each earning $50,000 a year. Before getting married, they each pay a tax of $10,000 (25 percent of $40,000), or a total of $20,000. After getting married, they have a total income of $100,000, and so they owe a tax of 25 percent of $90,000, or $22,500. Thus, when John and Joan get married, their tax bill rises by $2,500. This increase is called the marriage tax. We can fix the problem for John and Joan by raising the income exclusion
from $10,000 to $20,000 for married couples. But this change would create another problem. In this case, Sam and Sally would pay a tax after getting married of only $20,000, which is $2,500 less than they paid when they were single. Eliminating
the marriage tax for John and Joan would create a marriage subsidy for Sam and Sally. In practice, the U.S. tax code is an uneasy compromise that includes a combination of marriage taxes and marriage subsidies.
Whether a couple is better off (from a tax standpoint) being married or shacked up depends on how earnings are split between the two partners. If a man and woman have similar incomes (like John and Joan), their wedding will most likely raise their tax bill. But a marriage subsidy is likely if one partner earns much more than the other, and especially if only one of them has earnings (like Sam and Sally).
This problem has no simple solution. To see why, try designing an income tax with the following four properties:
_ Two married couples with the same total income should pay the same tax.
_ When two people get married, their total tax bill should not change.
_ A person or family with no income should pay no taxes.
_ High-income taxpayers should pay a higher fraction of their incomes than
low-income taxpayers.
All four of these properties are appealing, yet it is impossible to satisfy all of them simultaneously. Any income tax that satisfies the first three must violate the fourth. The only income tax that satisfies the first three properties is a proportional
tax. Some economists have advocated abolishing the marriage penalty by making individuals rather than the family the taxpaying unit, a policy that many European countries follow. This alternative might seem more equitable because it would treat married and unmarried couples the same. Yet this change would give up on the first of these properties: Families with the same total income could end up paying different taxes. For example, if each married couple paid
taxes as if they were not married, then Sam and Sally would pay $22,500, and John and Joan would pay $20,000, even though both couples have the same total income. Whether this alternative tax system is more or less fair than the current marriage tax is hard to say.