taxation

Question 1

What are the two goals whenmeasuring tax ation fairness?

Answer 1

Vertical equity: The principle that groups with more
resources should pay higher taxes than groups with
fewer resources. (-LIKELY REQUIRING PROGRESSIVE TAXATION)
* Horizontal equity: The principle that similar individuals
who make different economic choices should be
treated similarly by the tax system.

Question 2

State the differences between progressive, porportional and regressive

Answer 2

• Progressive: Tax systems in which effective average tax
  rates rise with income.
• Proportional: Tax systems in which effective average
  tax rates do not change with income so that all
  taxpayers pay the same proportion of their income in
  taxes.
• Regressive: Tax systems in which effective average tax
  rates fall with income.

Question 3

State the difference between marginal tax rate and average tax rate

Answer 3

Marginal tax rate: The percentage that is paid in
taxes of the next dollar earned.
o Average tax rate: The percentage of total income
that is paid in taxes.

Question 4

Whta are the two basic tax efficiency principles?

Answer 4

Tax efficiency comes down to two key principles:
o The more elastically supplied or demanded the
good, the larger the deadweight loss from the tax.

o The higher the tax rate, the larger the incremental
deadweight loss of taxation.

Question 5

What’s the ramsey rule- the theory of optimal commodity taxation?

Answer 5

To minimize the deadweight loss of a tax system
while raising a fixed amount of revenue,

taxes should be set across commodities so that the ratio of the marginal deadweight loss to marginal revenue raised is equal across commodities.

Optimal taxation therefore balances two rules:
o Elasticity rule: Lower taxes on goods with more elastic demand.
o Broad base rule: Better to tax a wide variety of good moderately than few goods heavily