When government is trying to raise tax revenue, it sometimes attempts to target higher-income people, because they are in a better position to bear the burden of a tax. However, it can be very difficult to earn tax revenue from wealthy people.
a. Consider the progressive nature of the U.S. federal income tax system: It’s designed so that higher incomes are taxed at higher tax rates. Thinking about the elasticity of labor supply, why might it be more difficult to collect tax revenue from a wealthy individual than from a poor person, all else equal?
b. Another way governments have tried to collect taxes from the wealthy is through the use of luxury taxes, which are exactly what they sound like: taxes on goods that are considered luxuries, like jewelry or expensive cars and real estate. What is true about the demand for luxuries? Consider jewelry. Is a luxury tax more likely to hurt the buyers of jewelry or the sellers of jewelry?
c. The chapter began by discussing another tax that targets wealthy individuals: the estate tax. Comment on the effectiveness of this tax (in terms of government revenue), considering the demand of wealthy individuals for leaving an inheritance.