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C HAPTER 19 T AXATION AND R ESOURCE A LLOCATION 1. Federal tax revenues have increased, but only in proportion to the increase in national income. Figure 19-1 in the text shows that the ratio of federal taxes to GDP has stayed roughly constant for half a century. Furthermore, the level of taxation in the U.S. is fairly low in comparison to other industrialized countries. So there is little evidence to indicate that current tax rates will ruin the country. 2. Critics opposed President Bush’s tax cuts for many reasons. Some argued that tax cuts would eliminate the federal government’s budget surplus and possibly lead to a future budget deficit. Another criticism was that the tax cuts were skewed towards the rich, thereby increasing the gap between the rich and the poor. The counter to these concerns is that since the Bush tax cuts reduced marginal tax rates the efficiency of the economy should improve. Also some supporters of the tax cuts pointed out that although the rich would receive tax cuts, they also pay the highest taxes. Some Bush supporters also argued that the government should return some of the budget surplus to the taxpayers. 3. The tax is regressive, since the average tax rate falls as income rises: Tax Rate Income Tax Marginal Average $20,000 $2,000 -- .10 30,000 2,700 .07 .09 40,000 3,200 .05 .08 50,000 3,500 .03 .07 4. The answers to these questions are not obvious, and students may be able to argue various points of view. (a) The progressive income tax promotes vertical equity, if one believes that income differentials should be reduced. It promotes horizontal equity, unless one thinks that the exemptions and deductions (“loopholes”) are too large. (b) The excise tax on cigarettes serves no principle of tax equity. Since the poor spend a higher proportion of their income on cigarettes that do the rich, it violates vertical equity. Since people with the same income spend different amounts on cigarettes, it violates horizontal
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This note was uploaded on 04/14/2010 for the course ECONOMICS 2312 taught by Professor William during the Spring '09 term at 東京大学.

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