Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 20, Problem 5DQ
To determine
The trade-off between equality and efficiency.
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To combat income inequality and to generate increased tax revenues to fund expenditures, government officials decide to aggressively increase how progressive income taxes are, so much so that the top income earners are marginally taxed 90% of their income (and while this marginal tax rate may seem oppressive, these top income earners still have more than enough income to satisfy all of their needs and all but the most extravagant of wants - basically, these earners have more than enough money).
Argue why this tax policy is a fair approach to fund government expenditures.
Why might this tax policy fail to achieve its objectives (tax revenues would actually decline as a result)?
Those on the political left would tend to favor _____ government action and _____ taxation to reduce income inequality.
more; lower
less; higher
more; higher
less; lower
Many economists believe that a more effective way to supplement the income of the poor is through a negative income tax. Under this scheme, everyone reports his or her income to the government; individuals and families earning a higher income will pay a tax based on that income, while low-income individuals and families receive a subsidy, or negative tax. Assume that the only qualification required to receive a tax credit is low income.
Suppose the government uses the following equation to compute a family’s tax liability:
Taxes Owed
=
(1/4 of Income)−$6,000
For each of the incomes listed in the following table, determine the tax liability for a family with that income level. (Note: If a family receives a subsidy because its income is too low, be sure to indicate the tax liability as negative.)
Income
Tax Liability
(Dollars per year)
(Dollars per year)
0
12,000
24,000
60,000
True or False: Any family with an annual income more than…
Chapter 20 Solutions
Economics: Principles & Policy
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- Which of the following is an example of a positive economic statement? a.The government should not be involved in the income redistribution schemes. b.The after-tax distribution of income is more equal than the pre-tax distribution of income. c.The distribution of income in the United States should be more equal. d.The tax system should be more progressive so that the after-tax distribution of income can be more equal.arrow_forwardWhen the income tax was first proposed in 1894, it was ruled unconstitutional? True or falsearrow_forwardShould the richest Americans be taxed on their wealth? Rich Americans have already paid income tax on the earnings that made them rich in the first place. Isn’t taxing wealth double taxation?arrow_forward
- Discuss the view that the best way to achieve greater equity in the distribution of income in a country is to use a progressive tax system.arrow_forwardMark Zuckerberg of Facebook and Elon Musk of Space X have taken risks to build to their businesses and been successful at it. The fundamental premise for their success mostly hinges on the ownership of private property and free market forces. For billionaires like them who have made their wealth mostly based on their own effort and perseverance, would it be fair to impose high income tax on them to redistribute their wealth to help the poor?arrow_forwardHorizontal equity in a taxation system is the idea that Select one: a.those who earn more should pay more tax. b.everyone should pay the same amount of tax. c.all taxpayers should be treated the same. d.those who earn the same should pay the same tax. Which of the following taxation systems does not conform to the idea of vertical equity? Select one: a.A flat tax where every dollar of income is taxed at 25 percent. b.A progressive tax system. c.GST. d.A poll tax where every taxpayer pays an identical lump sum amount of $10,000 in tax.arrow_forward
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