prob_set_05ans

prob_set_05ans - University of California, Davis Department...

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University of California, Davis Department of Economics ECONOMICS 131 L. Jay Helms Answers to Problem Set #5 1. The Treatment of Charitable Contributions a. A deduction reduces taxable income by a certain amount. (It is therefore worth more to those in higher tax brackets.) In contrast, a tax credit is subtracted from the tax liability—not taxable income. (It therefore reduces taxes paid dollar-for-dollar regardless of tax bracket.) b. The principle of vertical equity states that tax burdens should be distributed “fairly” across people with different abilities to pay. This view holds that a deduction, which is worth more to those with higher incomes (those in higher tax brackets), provides a larger subsidy to the well-off than to the poor, which might be found to be “unfair.” c. Haig-Simons income is the money value of the net increase in an individual’s power to consume during a period. In other words, it is the value of consumption plus the change in real net worth. d. Charitable contributions could be regarded as an obligation which reduces funds available for consumption. (This assumes that the contributions themselves are not viewed as a form of consumption). Then it is
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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_05ans - University of California, Davis Department...

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