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mid208.ans - Economics 150 Midterm Exam 1(5 points What is...

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Economics 150 Midterm Exam February 21, 2008 1. (5 points) What is the proposed tax base under a "Comprehensive Income Tax"? The proposed tax base equals the amount a household could consume in a year while holding assets unchanged from their value at the beginning of the year. By the budget constraint, this base equals labor income plus accruing income on savings. 2. (10 points) What would be the effects of such a tax on labor supply, given income and substitution effects? For any given net-of-tax labor supply, what are the effects of the tax on savings for retirement, given income and substitution effects? Due to income effects of the tax, individuals are poorer, so would work more. However, due to substitution effects the payoff from extra work falls. Net effects of the tax on labor supply are unclear. The taxation of income from savings lowers utility, so due to income effects leads to lower current consumption and more savings. However, the return to extra savings falls due to the tax, so that substitution effects lead to a fall in savings. Net effects of the tax on savings are unclear. 3. (10 points) List some forms of return to labor that are taxed more favorably than wage and salary income. Fringe benefits are untaxed. Pension contributions are taxed more favorably to the extent that the tax rate during retirement is lower than the current tax rate. Deferred compensation as through a stock option is taxed more lightly to the degree that tax rates are lower at some point in the next ten years. Non-monetary compensation on the job is untaxed. Work done for oneself, e.g. repairing plumbing or renovating one's house is either untaxed or taxed at capital gains rates. Self-employment income is frequently untaxed due to the ease of tax evasion. 4.
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mid208.ans - Economics 150 Midterm Exam 1(5 points What is...

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