Taxation Policy and Structure answers

Taxation Policy and Structure

ECON353 – OP01

Assignment #1: Answers

 

  • Referring to table 1.1, it is evident that total expenditures increased significantly (119 percent) between 1991 and 2014. However, this may be misleading as it does not take into account inflation, population growth, or the size of the economy. We may come to different conclusions about changes in the size of government depending on which of these measures we use. Accounting for inflation, the size of government has increased by 39 percent. Taking into consideration population growth, the size of government has increased by nearly 10 present. Finally, taking into account the size of the economy, the size of government has fallen.

 

  • Theory tells us that the statutory incidence and the economic incidence may be very different. The economic incidence of the tax depends on the relative elasticities of the supply and demand curves. The economic incidence of the increase in CPP premiums will fall more heavily on employees if the supply of labour is more inelastic relative to the demand for labour. There is evidence that the elasticity of the total supply of hours of work is about zero. If the supply of labour is perfectly inelastic, employees would bear the entire burden of the increase in CPP premiums.

 

  • Ad valorem tax on a monopolist, Dx and MRx pivot rather than a parallel shift as with a unit tax. The quantity demanded decreases (X0 to X1), the price paid by consumers goes up (P0 to Pg), and the price paid by the monopolist may increase or decrease depending on the shapes of the MR and MC curves. In the example illustrated below, price paid by the monopolist goes down (P0 to Pn). Monopoly profits decrease from (P0 – ATC0)X0 to (Pn – ATC1)X1.

 

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Taxation Policy and Structure

ECON353 – OP01

Spring 2021

 

 

4)

  1. The part-time worker in the fast-food industry pays no income tax, since everyone gets a $18,000 deduction. His marginal tax rate is 0% and his average tax rate is 0%.
  2. The office manager has a taxable income of $54,000 ($72,000 minus $18,000), and pays $5,400 in taxes (10 percent of income). His marginal tax rate is 10% and average tax rate is 7.5%.
  3. The CFO pays $7,000 in taxes since no tax is levied above $70,000. Her marginal tax rate at her current income level is 0% and her average tax rate is 3.5%.

 

5) When evaluating excess burden, the answer depends on your assumptions about the elasticities of the supply and demand curves.

  1. Supply of land is perfectly inelastic (fixed supply), so the excess burden from a tax will be zero.
  2. Demand for gasoline is expected to be inelastic, so the excess burden from a tax will be small or possibly zero.
  3. Demand for orange juice is likely fairly elastic (it has many substitutes), so the excess burden from a tax is likely to be larger.
  4. The supply of seats in a theatre (capacity) is somewhat fixed and therefore relatively inelastic. The excess burden from a subsidy will be small.
  5. Demand for cigarettes is relatively inelastic (perhaps perfectly inelastic), and therefore the excess burden of a tax will be small or possibly zero.

 

 

 

 

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