Questions and Answers of Public Finance In Canada

Jones, who has a personal income tax rate of 40 percent, holds an oil stock that appreciates in value by 10 percent each year. He bought the stock one year ago. Jones’s stockbroker now wants him to
Assume that two municipalities (in the same province) have different demand curves for firefighters and can hire firefighters at the same constant marginal cost.a. Draw diagrams illustrating the
Suppose that a lack of information leads individuals to underestimate the true benefits of “early detection” medical procedures, like screening for colon cancer. This leads to a discrepancy in
Parents with children under 18 can split their incomes for tax purposes: one spouse may shift up to $50,000 to the other in order to lower their combined income taxes. Suppose this policy is
Rich lives two periods. His earnings in the present are $100; in the future they are $75.6. The interest rate is 8 percent.a. Suppose Rich’s earnings are subject to a 25 percent tax. Suppose also
In January 2000, delegates at the founding convention of the Canadian Alliance (a predecessor to the current Conservative Party) voted to make a 17 percent “flat-rate” tax the cornerstone of the
According to Nobel Laureate Ed Prescott, “Increasing tax rates [in Europe] will not increase revenue” (Prescott, 2004: 2). What assumptions must hold in order for this statement to be correct?
Use the same table as in Exercise 5 above but assume now that the retail item (the sale by Z to the consumer) is exempt from GST. How much does each producer(a) Collect in GST, (b) Receive as a
Some Canadian political leaders have referred to “those corporate welfare bums” when average tax rates on corporate-source income have been low. What view of the corporation is implicit in this
Finance Minister Michael Wilson’s 1987 tax reform contained several provisions that increased corporate taxes. The White Paper that accompanied the tax reform did not include an analysis of the
Canada, through its dividend tax credit, has achieved partial integration of its corporate income tax with its personal income tax. Would a move to more complete integration, or some other means of
“Small corporations should face lower tax rates than large businesses, just as individuals with low incomes should face lower income tax rates than those with high incomes.” What view of the
Ahmed’s personal marginal income tax rate is 15 percent at the federal level and 5 percent at the provincial level. Bindi’s federal and provincial personal marginal income tax rates are 29
The Quebec government provides a tax holiday—a temporary reduction in the corporate tax rate for several years—for small- and medium-sized manufacturing companies investing in remote regions.
Assume Canada is a small, open economy such that the supply of capital is perfectly elastic at a net rate of return equal to 10 percent. Suppose the demand for capital in Canada is a downward sloping
Jimbo Corporation distributes its after-tax earnings to shareholders as dividends. Jimbo’s before-tax earnings per share are $200 and the corporate tax rate is 50 percent. Roodly and Drey each own
Suppose that corporation XYZ has a domestic income of $1,000,000 and paid foreign taxes of $200,000. If the domestic corporate tax rate is 25 percent, how much will XYZ pay in domestic taxes if
What role has the Canada Health Act played in shaping the evolution of the Canadian health system?
Can you think of reasons why the problem of adverse selection in the market for health care insurance might become more severe among the older cohorts in the population?
In Germany and the Netherlands, public health care insurance is voluntary for people with relatively high annual incomes (while public coverage is mandatory for those with middle and lower incomes).
Consider an individual whose earnings are taxed at a rate of 25 percent under the personal income tax and at a combined rate of 10 percent under the Canada Pension Plan and Employment Insurance
Yasser and Hikaru are video game fans and they agree to jointly sponsor the prize fund for a tournament. They wish to attract marquee players to the event and they recognize that the larger is the
Return to Exercise 5 in Chapter 4, where Moe, Larry, and Curly are hiring the services of an acting coach. Suppose the coach’s fee is $15 per hour.a. If the trio share the hourly cost equally, and
In each of the following circumstances, decide whether the impact of government on the economy increases or decreases and why. In each case, how does your answer compare to that given by standard
Suppose the government imposes a quota restricting the production of apples to an amount less than the competitive market equilibrium quantity. Illustrate this situation on a production possibilities
Industries in the country of Technologia invest in new equipment that annually increases productivity of private workers by 3 percent. Government employees do not benefit from similar technical
Why do you think firms lobby the government to enact policies that restrict production in their industry, rather than simply agreeing to restrict production on their own?
For each of the following, decide whether the activity should be under the control of the federal, provincial, or municipal government, and explain why.a. Auto air pollution control regulations.b.
The federal government drastically cut transfers to provinces and replaced some conditional grants for social assistance with unconditional ones. Discuss the effects of these changes on the
An econometric study found that the more ethnically diverse a country, the more decentralized its public sector is likely to be, other things being the same (Panizza, 1999). Is this finding
Consider the case where the federal government is willing to spend $X in the form of a grant to provinces. Using diagrams such as those in Figures 8.2 and 8.4, show that with normally shaped
When the federal government announced its changes to equalization in 2007, it provoked an immediate and negative response from the premier of Newfoundland. He argued that the federal government had
This problem uses equalization data provided in an Excel spreadsheet available on the OnlineLearning Centre at www.mcgrawhill.ca/olc/rosen.a. Using the template and data provided in the spreadsheet,
Consider the following situation. A couple, who recently had twins, makes two claims for parental leave. The husband makes a claim for the birth of one twin. The wife makes her claim for the birth of
Why is the demand for health care services different from the demand for other kinds of services?
a. Show that the unemployment rate, ur, is related to the employment rate, er, and labour force participation rate, pr, as follows:b. Suppose the labour market is in equilibrium when the labour force
Judging from media reports, the Canadian health system is operating under tremendous financial pressure, and is in danger of collapse. As an economist advising the federal Minister of Health, what
Nathan’s income in a typical year is $75,000. There is a 10 percent chance that Nathan will be seriously ill next year, incurring $15,000 in medical expenses. Samantha also earns $75,000 in a
What problems would arise in setting experience-rated employment insurance premiums with regard to the following?a. Distinguishing between quits and layoffs.b. Setting rates for new businesses.c.
Two individuals, Harry and Ron, are both working. Harry faces a 10 percent chance of becoming unemployed for three months and losing $12,000 in income. Ron’s probability of becoming unemployed is
Briefly discuss the effects of a higher benefit rate on the duration of unemployment. How are the incentive effects altered if the change in the benefit rate is expected to be temporary rather than
“Public pensions improve economic welfare. Because the system distributes current earnings of the young (which they would save anyway) to the old, the old are better off and the young are
Will an increase in the Canada Pension Plan contribution rate increase the national savings rate?
Why do we have two public pension systems, OAS/GIS/SA and CPP/QPP? Discuss the rationale for having two pension systems and the relationship between them.
Consider a model in which an individual lives only two periods. The individual has diminishing marginal utility of consumption and receives an income of $20,000 in period 1 and an income of $5,000 in
Consider the social rates of return provided in Table 13.3. The social rates of return for graduate degrees appear to be very low (or negative). Based on these estimates, an analyst recommends that
Elizabeth’s wage rate is $5 per hour. She faces a welfare system that pays a monthly benefit of $150. The benefit is reduced by 25 cents for each dollar of earnings.a. Sketch the budget constraint
Suppose you wanted to conduct an econometric study of the impact of job training programs on future earnings. What data would you need? Suggest a specific estimating equation.
Hermione, without a job or job prospects, has been on social assistance for the past four months. Social assistance pays a basic benefit of $600 a month with a benefit reduction rate of 75 percent
There is a growing concern with the incidence of poverty among unattached, non-elderly individuals. Feng, Dubey, and Brooks (2007) find that being a high school leaver is an important risk factor for
Hanson (2006) provides evidence that the private rate of return to university education differs substantially depending on the area of study. Tuition fees that differ substantially from program
In David Johnson’s Signposts of Success, elementary schools are identified as “good” schools when they outperform other schools with similar socioeconomic characteristics. For example, if two
In the province of Alberta, the tax on hotel rooms is 5 percent. Supporters of this tax argue that the tax benefits the province because its victims are largely out-of-province tourists. Use the
Higher payroll taxes may be required to finance the Canada Pension Plan as the population ages. If employers are asked to pay all of any such increase, rather than sharing the increase equally
Assume that the capital–labour ratios are identical in all sectors of the economy. What determines the incidence of a tax on the output of any single sector?
Suppose that the income tax in a certain nation is computed as a flat rate of 5 percent, but no tax is levied above $50,000 in taxable income. Taxable income, in turn, is computed as the
Internet purchases are thought to be highly sensitive to tax rates, and applying sales taxes to all such purchases substantially reduces the number of online buyers and the amount of online spending.
In 2004, the city of Cologne, Germany, instituted a “pleasure tax.” Among other things, the tax applied to massage parlours, table-dancing clubs, and brothels. Many sex workers complained that
The applied incidence study by Lee (2007), discussed in this chapter, assumes that personal income taxes are fully borne by the taxpayer with no shifting. However, there is some evidence provided by
Arnie has an income of Y and spends it only on food and music. Let PF and PM denote the price of food and music, respectively, and denote the quantities by QF and QM. In the absence of taxes,
Petroleum products manufacturing is one of the most capital-intensive industries in Canada. Use a general equilibrium framework to discuss the possible incidence of a tax on petroleum products.
According to the study by Kleven, Landais, and Saez (2015), the international migration decisions of top-earning European soccer players is very sensitive to income tax rates—when the tax rates
Which of the following is likely to impose a large excess burden?a. A tax on land.b. A subsidy for personal computers.c. A tax of $75 on iPods, MP3 payers, and smart-phones. (An “iPod Tax” was
The combined federal and provincial taxes on a carton of 200 cigarettes were reduced from $24 to $10 in Ontario in February 1994. (a) Describe how you would compute the reduction in excess
Suppose the market demand curve for beer is described by the equation QDb = 600 − 15Pb, where QDb is the number of cases of beer and Pb is the price. The supply curve is given by
Suppose a 10 percent tax is imposed on airplane tickets.a. Use Equation (15.3) to calculate the excess burden of this tax when the price elasticity of compensated demand is -1.1 and airplane ticket
Setting a price ceiling for a good (below the normal market price) results in an excess burden. Demonstrate this, by using supply and demand curves. In addition, show how the imposition of a tax on a
Prior to 1988, Canada’s tax authorities permitted business meals and entertainment expenses to be fully deducted in calculating taxable income. Since then, the allowed deduction has been reduced to
In Thailand, where commodity taxes account for almost 60 percent of tax revenues, the price elasticities for food, alcohol, and telecommunications are estimated to be -0.10, -0.84, and -0.25,
Suppose that Sharlene faces a marginal income tax rate of 35 percent, and if she cheats on her taxes, there is a 2 percent chance that she will be caught. Suppose also that the marginal penalty of
In Canada, a husband and wife are taxed separately on their incomes. In contrast, in the United States the fundamental unit of taxation is the family; regardless of whether the husband or the wife
A study by Dahlby and Ferede (2015) provides estimates of the marginal excess burden per additional dollar of revenue in the Canadian provinces (in 2013). For Manitoba, it is 2.07 for the corporate
The demand for X is given by X = 100 - 2Px, and its supply is perfectly elastic at Px = 14. The demand for Y is given by Y = 350 - 3Py, and its supply is perfectly elastic at Py = 18. The government
A study by Judge and Cable (2004) finds that taller people have higher incomes; every extra inch in height amounts to a predicted salary increase of nearly $800 per year. On the basis of optimal tax
Jack and Jill live alone on an island. Their labour supply schedules are identical and given by L = (1 - t )w, where t is the income tax rate and w denotes the wage. Jill’s wage is 6 and Jack’s
In Adam Smith’s The Wealth of Nations, he describes a “window tax” that was imposed on dwellings in England. The tax per window increased with the number of windows.a. Evaluate this tax in
According to well-placed sources, in 1994 the Department of Finance was considering a change in the tax treatment of employer-provided dental care plans. Under the policy being considered, the value
The tax credit for charitable donations rises from 15 percent on the first $200 to 29 percent on donations over $200. Why would the heads of organizations dependent on charitable contributions think
The purpose of this problem is to consider how effective marginal tax rates are affected by various clawbacks, payroll taxes, and surtaxes.a. Consider a family of four (two children, age 10 and 12,
Suppose the Working Income Tax Benefit (WITB) tops up a single individual’s income by 25 percent of the amount that employment earnings exceed $3000, up to a maximum payment of $1000.a. Assume that
Brian Mulroney’s 1987 tax reform included a substantial gradual increase in the limit, from $7,500 to $15,500, for contributions to registered retirement savings plans (RRSPs). The interest earned
In the mid-1990s, the Japanese government implemented a set of very large, temporary tax cuts. These cuts had very little impact on personal consumption (Watanabe et al., 2001). Is this finding
Use the life-cycle model to evaluate whether a rational saver would follow this piece of advice: “To compensate for falling interest rates, aim to save more every month.”
Apollo has T hours to allocate between work and leisure. His wage rate is w and he also has nonlabour income equal to a fixed amount, A. The income tax rate is t. Write an algebraic expression for
The U.S. Immigration Act of 1965 imposed severe restrictions on the emigration of Canadians to the United States until the Free Trade Agreement of 1988 (Davies and Winer, 2011). What impact might you
An editorial in the Wall Street Journal (2001) argued, “high marginal tax rates . . . discourage incentives . . . to take risks,” The proposition seems plausible. Why take a chance on a risky
Zach lives two periods, earning $31,500 in the first and nothing in the second. The rate of return on savings is 8 percent. Zach faces a sales tax rate of 5 percent and a tax rate on interest income
Amy and Shirley both live two periods. Both have earnings of $1,000 in the present and zero in the future. The interest rate is 8 percent. Suppose that they are each subject to an income tax, and
In the table below, with a GST rate of 5 percent, how much does each producer (a) Collect in GST; (b) Receive as a GST credit; and (c) Remit to the government? Sale value GST
On July 1, 2006, the federal government reduced the GST rate but raised the income tax rate in the lowest tax bracket to help make up for the lost revenues. Discuss the possible effects of this
Measuring income on an accrual basis creates serious problems for an income tax system. Explain the nature of these problems and how a shift to a personal consumption tax would help to eliminate the
Evaluate the following critique of the Hall-Rabushka flat tax: “The flat tax does not treat all income the same. It taxes only salaries and wages and leaves investment income untouched” (Chait,
As a result of Brian’s will, $100,000 is paid to his son John at the time of Brian’s death in 2012. The $100,000 is not to be included in the income of John. However, this is not a flaw in the
David and Jonathan own identical homes. David has owned his home for many years and paid $100,000 for it. Jonathan purchased his home after a recent property tax increase and paid $80,000. Should the
Residential properties typically face a lower tax rate than commercial and industrial properties. Explain how the allocation of resources might change in a city if it were to raise the tax rate on
Opponents argue that taxes on the transfer of wealth will reduce work effort, reduce saving, and reduce the willingness to make risky investments. Whether or not you agree with this assessment,
The City of Ottawa charges the developers of residential housing for the cost of constructing storm sewers, roads, street lights, libraries, police stations, parks, and community recreation
The City of Calgary opened a new airport runway in 2014. To avoid having to close direct road access to the airport from the city’s northeast, the city plans to build a tunnel under the new runway.
Suppose Toronto adopted a tax on land value instead of a property tax (while collecting the same revenue). Would downtown parking become scarcer? Would the reform in Toronto have an effect on the
Heal (2001, p. 1) notes that when Frederick Law Olmsted, the developer of New York City’s Central Park, was asked how the city would pay for the park, “he responded that its presence would raise

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