week7

Question 1

Elasticities determine tax efficiency

Answer 1

Deadweight loss is caused by individuals and firms making inefficient consumption and production choices in order to avoid taxation.
The inefficiency of any tax is determined by the extent to which consumers and producers change their behavior to avoid the tax.
The more elastic is demand or supply, the larger the DWL.

Question 2

Tax rate and DWL

Answer 2

Marginal deadweight loss: The increase in deadweight loss per unit increase in the tax.
The marginal DWL rises with the tax rate.

Question 3

Government efficiency in taxation over time is maximized by…

Answer 3

having a relatively constant tax rate over time rather than high taxes in some periods and low taxes in others.
High and then low tax rates produce a larger DWL than steady medium tax rates

Question 4

Tax efficiency 2 keys

Answer 4

1. The more elastically supplied or demanded the good, the larger the deadweight loss from the tax.
2. The higher the tax rate, the larger the incremental deadweight loss of taxation.

Question 5

Laffer curve

Answer 5

As tax rates rise from 0 to τ, tax revenues rise, but when tax rates rise above τ toward 100%, tax revenues fall.

Question 6

The work/leisure decision:

Answer 6

The choice between work and leisure depends on the wage.

Question 7

Taxes have two effects

Answer 7

1. The fall in the price of leisure induces a substitution effect toward less work.
2. The fall in income has an income effect, one must work harder to keep the same purchasing power. Thus, the income effect leads toward more work.

Effects are opposite-signed, so the theoretical impact of taxation on labour supply is ambiguous.

If substitution effects dominate, then
 the labor supply curve has the typical upward-sloping shape.

If income effects dominate, then,
 the labor supply curve will slope downward

Question 8

labour supply

Answer 8

Labour supply response to changes in income is positive; greater income means more labour supplied, not less.

Question 9

Guaranteed minimum income

Answer 9

+ : less poverty, simplicity
-: implicit marginal tax rate of 100%, incentive to work less

Question 10

Negative income tax

Answer 10

+: People have an incentive to work because they keep part of their earnings
-:More expensive than the guaranteed minimum income