Chapter-17 Part-4
Aplia Homework: Taxation and Resource Allocation
1. Computing and interpreting average tax rates
In a hypothetical economy, Brian earns $14,000, Crystal earns $28,000, and Edison earns $42,000 in annual income. The following table shows the annual taxable income and tax liability for these three single individuals. For example, Brian, who earns $14,000, owes $1,540 in taxes.
Use the tax liability figures provided to complete the following table by computing the average tax rate for Brian, Crystal, and Edison with an annual income of $14,000, $28,000, and $42,000, respectively.
| Taxable Income | Tax Liability | Average Tax Rate | |
|---|---|---|---|
| (Dollars) | (Dollars) | (Percent) | |
| Brian | 14,000 | 1,540 | _____ |
| Crystal | 28,000 | 3,080 | _____ |
| Edison | 42,000 | 4,620 | _____ |
The income tax system for this country is ________.
2. Categorizing U.S. taxes
Determine whether each of the following taxes are progressive or regressive.
| Tax | Progressive | Regressive | |
|---|---|---|---|
| A sales tax that adds 5% to the sale of all items | _____ | _____ | |
| The U.S. payroll tax (a constant tax rate on wages up to a certain amount, after which the marginal tax rate is 0%) | _____ | _____ | |
| The U.S. income tax | _____ | _____ |
3. Direct versus indirect taxes
Which of the following is an example of a direct tax? Check all that apply.
The September 11 Security Fee that is added to the price of airline tickets
A “head tax” that charges everyone the same dollar amount
Federal income tax
The Universal Service Fee that is added to the price of phone services
4. Principles of tax equity
Which of the following is consistent with the principle of horizontal equity?
People should pay taxes based on the benefits they receive from government services.
Taxpayers with a lesser ability to pay taxes should pay larger amounts.
Taxpayers with a similar ability to pay taxes should pay the same amount.
Taxpayers with a greater ability to pay taxes should pay larger amounts.
5. Tax principles
Excessive alcohol consumption can lead to liver failure as well as deterioration of other organs. Suppose the government has opened several public clinics dedicated to helping alcoholics reduce their alcohol consumption. Now the government is trying to decide how to fund these clinics.
One suggestion is to raise the funds for the public clinics with a liquor tax. This tax follows:
Neither the ability-to-pay principle nor the benefits principle
The benefits principle
The ability-to-pay principle
6. Efficiency in taxation
During the football season, Lorenzo enjoys going to the local sports bar every Monday night to have a beer while watching the game.
Now suppose the local government, in the interest of discouraging alcohol consumption, introduces the following tax schedule for different types of alcoholic drinks.
If Lorenzo continues drinking beer, his total burden of the tax is _______ per drink.
If he now starts to drink hard liquor, his total burden of the tax is ________ per drink.
If he starts to drink wine instead, his total burden of the tax is ______ per drink.
7. Who should pay the tax?
The following graph shows the labour market for research assistants in the fictional country of Collegial. The equilibrium wage is $10 per hour, and the equilibrium number of research assistants is 200.
Suppose the government has decided to institute a $6-per-hour payroll tax on research assistants and is trying to determine whether the tax should be levied on the employer, the workers, or both (such that each pays half the tax).
Use the graph input tool to evaluate these three proposals. Entering a number into the Tax Paid by Employers field (initially set at zero dollars per hour) shifts the demand curve down by the amount you enter, and entering a number into the Tax Paid by Workers field (initially set at zero dollars per hour) shifts the supply curve up by the amount you enter. You will not be graded on any changes you make to this graph.
Hint: Begin by filling in the “Tax Paid by Employers” and “Tax Paid by Workers” fields with the appropriate values from the following table. Then determine the equilibrium wage and number of workers.
Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.
For each of the proposals, use the graph to determine the new equilibrium wage and number of research assistants hired. Then compute the after-tax amount paid by employers (that is, the equilibrium wage plus any taxes the employer pays) and the after-tax amount earned by research assistants (that is, the equilibrium wage minus any taxes the worker pays).
| Tax Proposal | Wage | Quantity Hired | Wage + Employers' Taxes | Wage – Workers' Taxes | |
|---|---|---|---|---|---|
| Employers Pay... | Workers Pay... | (Dollars per hour) | (Number of workers) | (Dollars per hour) | (Dollars per hour) |
| (Dollars per hour) | (Dollars per hour) | ||||
| 6 | 0 | ____ | ____ | ____ | ____ |
| 0 | 6 | ____ | ____ | ____ | ____ |
| 3 | 3 | ____ | ____ | ____ | ____
|
Suppose the government doesn't want to discourage employers from hiring research assistants and, therefore, wants to minimize the cost to the employers. Of the three tax proposals, which is best for accomplishing this goal?
The proposal in which workers pay the entire tax
The proposal in which each side pays half the tax
The proposal in which employers pay the entire tax
None of the proposals is better than the others
8. Key terms
Select the correct term for each of the following definitions.
| Definition | Terms |
|---|---|
| A tax levied on the purchase of some specific good or service | _________ |
| A tax levied on the earnings from work | _________ |
| A tax levied on the assessed values of houses and office buildings | _________ |
