prob_set_04

prob_set_04 - Optimal Commodity Taxation Suppose there are...

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University of California, Davis Department of Economics ECONOMICS 131 Spring 2008 L. Jay Helms Problem Set #4: Optimal Taxation 1. Tax Equity and Optimal Taxation Suppose there are three taxpayers described as follows: Mr. X is a farmer earning $10,000 per year. Ms. Y is a construction worker also earning $10,000 per year. Mr. Z is a farmer earning $30,000 per year. Both farmers have labor supply schedules which are much less elastic than the construction worker’s schedule. Comment on how the desirable pattern of income taxes to be imposed on the income of X, Y, and Z is influenced by the following considerations: a. horizontal equity; b. vertical equity; and c. optimal tax principles. 2.
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Unformatted text preview: Optimal Commodity Taxation Suppose there are two goods (X and Y) with compensated elasticities of demand of -1.0 and -0.5, respectively. They are neither substitutes nor complements. a. What can you say about the relative rate of ad valorem commodity taxation on X and Y based on the principles of optimal taxation? b. What can you say about the reduction in compensated demand for X and Y which will occur due to optimal commodity taxation? c. Comment on these taxes using the criteria of horizontal equity and vertical equity . d. Could excess burden be reduced by replacing optimal commodity taxes with a lump-sum tax which yields the same revenue? Economics 131 Problem Set #4 Page 2....
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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.

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prob_set_04 - Optimal Commodity Taxation Suppose there are...

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