1 a. Construct a numerical example to show that the exclusion of municipal bond interest from income taxation is equivalent to a government subsidy of state and local capital spending.
b. Explain why it costs the government (taxpayers) more to subsidize this activity through the exclusion of municipal bond interest than it would be to simply give the subsidy directly.
2a. Explain what economists mean when they classify taxes as being progressive, proportional or regressive.
b. How would you classify a tax in which every person paid $1000?
c. How would you classify a tax in which the first $50,000 of income was tax exempt and then anything above $50,000 was taxed at a rate of 20%?
d. How would you classify a tax in which every person paid 8% of their income? Explain
3. A nation has a tax rate of 20% on the first $20,000 of taxable income, 30% on the next $30,000, 40% on the next $20,000 and then 50% on all taxable income above $70,000.
a. Find the ATR of someone with a taxable income of $100,000.
b. How much is a tax credit of $1000 worth to someone with a taxable income of $40,000?
c. How much is a tax credit of $1000 worth to someone with a taxable income of $60,000?
d. How much would a $1000 deduction be worth to someone with a taxable income of $40,000?
e. How much would a $1000 deduction be worth to someone with a taxable income of $60,000?
4. Assume you believe that income is a good proxy for ability to pay. What decisions what you have to make in order to make this operational?
5. Explain the connection between
a. tax burdens and elasticities
b. excess burden and elasticity
c. from the point of view of efficiency, is it better to tax items with a small or a large elasticity? Why?
6. The federal per unit excise tax on gasoline is increased and an industry analyst predicts that the increase will be entirely passed on to consumers. Show two cases in which the analyst would be correct. How likely is it that either of these two cases would occur in practice?