week 3

Question 1

What is a marginal tax rate?

Answer 1

A marginal tax rate is the rate at which the next EUR/USD/GBP etc. is taxed

Question 2

What is an average tax rate?

Answer 2

It is the percentage of total income paid in taxes (= weighted average marginal taxes)

Question 3

What are Vertical and Horizontal equity?

Answer 3

Vertical equity attributes higher taxes to those with more resources (progressive tax rates) whereas horizontal equity says that those with same resources should pay the same taxes.

Question 4

What is difference between a tax deduction and a tax credit?

Answer 4

A tax deduction refers to a reduction in taxable income whereas a tax credit refers to a reduction in amount of tax.

Question 5

Why are tax deductions regressive with vertical equity?

Answer 5

Deduction values rises with tax rate (which rises with income). This makes deductions regressive.

Question 6

Why is vertical equity better for tax credits?

Answer 6

tax credits are constant across incomes, therefore credits are progressive.

Question 7

What are commodity taxes and what are they levied on?

Answer 7

Commodity taxes are levied on transactions and include ad valorem taxes (per value) and excise taxes (per unit)

Question 8

What are the three rules of tax incidence?

Answer 8

1) Statutory burden is not equal to Economic burden
2) The market side on which tax is levied is irrelevant for the distribution of tax burden
3) The more inelastic party bears a larger share of the burden

Question 9

What do Chetty et al. 2009 try to find in their paper? What was their intervention?

Answer 9

They tried to manipulate price tags at a major US grocery chain to make sales tax more evident.

The intervention was to make price tags for some products show the tax-inclusive price and then track the sales of these products with scanner data.

Question 10

What is the triple difference approach used in the study (Difference in Difference in Differences)?

Answer 10

Products: cosmetics, deodorants and hair care products vs other products in the same aisle

Store: One large store in Northern California vs two other stores with similar demographics

Time Period: 3 weeks vs one calendar year plus 6 weeks

Question 11

What were the results of the study?

Answer 11

the treated group showed a -1.30 difference in mean quantity sold while the control showed a 0.84 increase. The difference in mean quantities sold between the two categories, therefore increased from 1.31 to 3.45

Question 12

What other study do they consider in this paper? What does it test? What are the results?

Answer 12

The other study considered is how changes in alcohol tax rates affect alcohol consumption across US states and time.

two type of alcohol tax; excise tax (included in price); sales tax (added at the register)

The results show that both and increase in log(1 +excise tax) and an increase in log (1 +sales tax) decrease log per capita beer consumption, however, the change is more drastic with beer consumption.

Question 13

What is the deadweight loss of taxation?

Answer 13

Deadweight loss = additional tax revenues - reduced consumer surplus - reduced producer surplus

DWL = 1/2 *tdX, with dX being the change in quantity due to taxes

DWL is proportional to the square of tax rate

DWL is proportional to the elasticity of demand

Question 14

When is it optimal to use a commodity tax?

Answer 14

A commodity tax is optimal to use when the tax rate across goods is chosen to minimize the deadweight loss (conditional on raising a given amount of govt revenue)

Question 15

What are the ramsey and inverse elasticity rule?

Answer 15

Ramsey rule: MDWL/ MR = lambda (refer to slide 35)

Inverse elasticity rule: t = (1/ elasticity) * lambda

Question 16

What is the implications of the ramsey rule?

Answer 16

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

Question 17

What are MDWL and MR?

Answer 17

MDWL is the extra deadweight loss from an infinitesimal increase in taxes.

MR is the extra tax revenue from an infinitesimal increase in taxes.

Question 18

What does a large lambda imply?

Answer 18

A large lambda implies that additional government revenue is more valuable; For an infinitesimal increase in taxes there is a large increase in deadweight loss than there is an increase in tax revenue

Question 19

two good A and B : MDWL/ MR for A > B. What does this imply?

Answer 19

Taxing good A cause more inefficiency than taxing good B. Tax on good A should be lowered and tax on B raised until ratios for both are equal to lambda

Question 20

What is the implication of the inverse elasticity rule?

Answer 20

Set taxes proportional to the inverse elasticity of demand for that good. This arises from the relationship of deadweight loss with elasticity of demand

Question 21

What is the counter balancing rule?
What is the broad basing rule?

Answer 21

Counterbalancing rule refer to taxing inelastic goods more.

The broad base rule mentions how it is preferable to tax many goods low, than tax a few goods high.