Chap02

Chap02 - Chapter 02 - Policy Standards for a Good Tax...

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Chapter 02 - Policy Standards for a Good Tax Chapter 2 Policy Standards for a Good Tax Questions and Problems for Discussion 1. This question is designed to lead to a class discussion of the various tax policy issues introduced in Chapter 2. 2. Historically, the federal income tax system has not generated enough revenue to fund the government’s spending programs. Consequently, the federal government has borrowed money to make up its deficits (excess of spending over revenues) and in doing so has amassed an $11 trillion national debt. The federal government operated at a deficit in every year from 1970 through 1998. In 1999 and 2000, it operated at a small surplus (excess of revenues over spending), but reverted to massive deficit spending in 2001 and subsequent years. 3. Governments can impose a new tax (by identifying and taxing a new base), increase the rate of an existing tax, or expand the base of an existing tax. 4. Governments that fail to control the growth of their money supply run the risk of devaluing the currency and triggering a crippling rate of inflation. Therefore, simply printing more money to fund an operating deficit is not a viable, long-term solution to an insufficient tax system. 5. a. Mrs. E could enter the work force. Her after-tax earnings could offset the decrease in the couple’s disposable income attributable to the tax rate increase. If Mr. E works for an hourly wage, he could possibly work more hours for his employer. If he doesn’t have this option, he could take a second job or even start a new business. b. As a self-employed individual, Mrs. F may have the flexibility to increase the number of hours devoted to her business. Her additional after-tax earnings could offset the decrease in the couple’s disposable income attributable to the tax rate increase. Mr. F has the same options as Mr. E. c. In this case, Mr. and Mrs. G have the same options as Mr. E and Mr. F. Because they are both full-time employees, their ability to increase their before-tax income may be limited. 6. a. Mr. H may not have any realistic way to decrease the time spent at work and increase his leisure time, even if the after-tax value of his labor decreases because of a tax rate increase. Mrs. H’s behavior should not change because of a tax rate increase. b. Mrs. J could quit her job and leave the work force if the couple decides that her leisure time is worth more than the after-tax value of her labor. c. As a self-employed individual, Ms. K has the flexibility to decrease the number of hours devoted to her business, thereby substituting additional leisure time for labor. 7. An increase in the income tax rate decreases the after-tax value of the bond investment but does not affect the value of the luxury auto. (Her personal use and enjoyment of the auto are nontaxable benefits to Ms. V.) Consequently, she may decide to consume the $40,000 (i.e., buy the auto) rather than to save it. 8.
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Chap02 - Chapter 02 - Policy Standards for a Good Tax...

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