Implicit taxes are very difficult to quantify and thus, are generally not considered when calculating average and effective tax rates (i.e., when
assessing relative tax burdens). Since implicit taxes are ignored in these calculations, taxpayers' may conclude that groups of taxpayers investing in
tax advantaged assets (subject to implicit tax) do not pay their fair share of tax as represented by a low effective tax rate.
95. The student is considering explicit taxes and ignoring implicit taxes. An explicit tax is a tax that is directly imposed by a government unit
and easily quantified. Implicit taxes are the reduced rates of pre-tax return that a tax-favored asset produces (e.g., the lower pre-tax rate of return
earned by tax exempt municipal bonds). Although implicit taxes are real and equally important in understanding our tax system, they are difficult
96. Mandy's forecast is based on dynamic forecasting (i.e., she is considering how taxpayers may alter their activities in response to the tax law
change). Given that Mandy is projecting a decrease in tax revenues, her estimates must be based on the substitution effect - i.e., taxpayers are
likely to substitute nontaxable activities (e.g., simply not purchase gum) for taxable purchases. The decreased tax revenue from gum sales does not
necessarily imply that Mandy will achieve a cleaner city as taxpayers may simply buy their gum outside the city. This will depend on how close
the city is to other towns/neighborhoods that do not impose the high gum tax.
Vertical equity is achieved when taxpayers with greater ability to pay tax pay more tax relative to taxpayers with a lesser ability to pay tax. One
can view vertical equity in terms of tax dollars paid or in terms of tax rates. Proponents of a sales tax (e.g., Milton) are more likely to argue that
vertical equity is achieved when taxpayers with a greater ability to pay tax pay more in tax dollars. Opponents of a national sales tax (e.g., Rocco)
are more likely to argue that taxpayers with a greater ability to pay should be subject to a higher tax rate. This view is based upon the argument
that the relative burden of a sales tax decreases as a taxpayer's income (e.g., disposable income) increases.
97. A sales tax by definition is a proportional tax - i.e., as taxable purchases increase, the sales tax rate (i.e., the marginal tax rate) remains
constant. For this reason, Milton is correct. Nonetheless, when you consider that the proportion of one's total income spent on taxable purchases
likely decreases as total income increases, the sales tax may be considered a regressive tax. For this reason, Rocco is correct.
From the taxpayer's perspective of economy, the federal income tax does not fare so well. The income tax is often criticized for the compliance