f92f_a - Economics 5300.03A Public Economics...

Info icon This preview shows pages 1–2. Sign up to view the full content.

Economics 5300.03A : Public Economics : Taxation (Sketchy) Answers to Final Exam January 1993 1. One of the main issues here is how the tax credit affects the effective marginal rate of taxation. The tax credit declines by 10% of any increase in the parent’s income, if the income is between $10,000 and $20,000 per year. Thus a parent with several children would face a very high marginal tax rate between these income levels. The budget sets would not be convex, since this extra tax disappears at income levels above $20,000 when the tax credit has been reduced to zero. The effect on labour supply would be a fairly substantial reduction, since the tax credit increases the parent’s exogenous income, and reduces the net wage at the margin. Discussion of the simultaneous nature of the two parents’ labour supply decisions would also be useful in answering this question. 2. What I wanted here was some reference to Summers’s point that the two–period model will substantially understate the elasticity of the savings response to the taxation of interest income. A permanent increase in the tax rate on capital income will ( ceteris paribus ) decrease the net interest rate used to discount future earnings. For a 25–year–old, this will mean a very large increase in the present value of the wages she expects to earn late in her working life. This increase will lead to a large increase in current consumption, and thus a big ( negative ) impact on current saving. 3. This is a utility function with constant absolute risk aversion. Here U ( W ) = ae - aW ; U ( W ) = - a 2 e - aW so that the index of absolute risk aversion is a constant a .
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern