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Unformatted text preview: Department of Economics University of California, Davis ECONOMICS 131 Spring 2008 L. Jay Helms Answers to the Midterm 1. Fairness in Taxation a. The principle of horizontal equity asserts people in equal positions should be treated equally. (There are various ways in which equality can be defined, including incomes, wages, utility, or ability to pay.) Taxing wages at a different rate than capital gains could be viewed as violating horizontal equity. So would taxing secretaries at a higher rate than waitresses, or married couples at a different rate than unmarried couples. Any system which assesses different taxes on two people with the same ability to pay could be seen as violating horizontal equity. b. The principle of vertical equity asserts that burdens should be distributed fairly across people with different abilities to pay; generally this is taken to mean that those with greater abilities to pay (as measured, perhaps, by income) should pay “appropriately” higher taxes. Thus, e.g., some argue that regressive taxes, or taxes (like the cigarette tax) with regressive impacts, violate vertical equity by unduly burdening the poor. Similarly, a tax on necessities (like food) might be seen as violating vertical equity even if recommended on the basis of optimal tax principles. c. The benefit principle asserts that those who benefit from a publicly provided service should be the ones to pay for those services. Thus, e.g., using gasoline taxes (or general income taxes) to subsidize urban mass transit would violate this principle, which would suggest that those who ride buses should pay for them. Similarly, providing taxpayer- financed national parks would violate the benefit principle because non- visiting taxpayers would be paying for services they do not use; instead, the benefit principle would argue for financing parks via entrance fees. Economics 131...
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This note was uploaded on 10/15/2009 for the course ECON 131 taught by Professor Staff during the Spring '08 term at UC Davis.
- Spring '08