Answered: What is wrong with this answer?

Microeconomics: Principles & Policy

14th Edition

ISBN:9781337794992

Author:William J. Baumol, Alan S. Blinder, John L. Solow

Publisher:William J. Baumol, Alan S. Blinder, John L. Solow

Chapter17: Taxation And Resource Allocation

Section: Chapter Questions

Problem 2DQ

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Question

In 1989, Senator Bob Packwood asked Congress’s Joint Committee on Taxation how much extra revenue the government would raise if it just started taxing 100% of all income over $200,000 per year. The Joint Committee crunched some numbers and reported an answer: $204 billion per year.

a. What is wrong with this answer?

In 1989, very few people made over $200,000 a year, so the estimate of the tax revenue is far too high.

Increasing government spending by $204 billion each year would have generated economic growth, and subsequently even higher amounts of tax revenues.

The Joint Committee on Taxation did not have the tools needed to make such an estimate accurately.

No one would have an incentive to work once they had earned $200,000, so much of the taxable income would disappear.

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