How to pay for national defense


Problem: You are advising the government on how to pay for national defense. There are two proposals for a tax system to fund national defense. Under both proposals, the tax base is an individual's income. Under proposal A, all citizens pay exactly the same lump-sum tax, regardless of income. Under proposal B, individuals with higher income pay a greater proportion of their income in taxes.

1. Is the tax in proposal A progressive, proportional, or regressive? What about the tax in proposal B?

2. Is the tax in proposal A based on the ability-to-pay principle or on the benefits principle? What about the tax in proposal B?

3. In terms of efficiency, which tax is better? Explain.

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Taxation: How to pay for national defense
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