Discuss the following statements (your answer should address the general principles involved):

(a) "Lump-sum taxes are non-distortive because they lead to a general equilibrium solution that is identical to the solution without taxes."

(b) "The government will cause fewer distortions if it raises a given amount of revenue through one rather than two distortive taxes."

Question 2

Show graphically the following.Suppose leisure is a normal good.If we replace one linear tax by another that has a lower marginal tax rate but we want to raise the same amount of revenue from the lower marginal rate tax.Then work effort will be increased.

 

Question 5

Explain in which ways we distort the decision of whether to invest in human or physical capital when we do not:

(a) tax human capital at birth, and

(b) permit tax deductions for human capital depreciation.

Question 6

Vickrey proposed a new tax on capital gains that was supposed to remove the implicit interest free loan advantage given by the current system of taxing on a realization basis.

 a) Explain in general how the Vickrey tax would work and what its real world drawbacks are. 

b) Auerbach has developed an alternative to the Vickrey tax that is supposed to be more real world practical. Explain why it is more practical, and also explain what its practical drawbacks are (Don't just say it is too complicated).

Answer rating: 100% (QA)

a The statement that lumpsum taxes are nondistortive because they lead to a general equilibrium solution that is identical to the solution without taxes is partially true Lumpsum taxes refer to taxes ... View the full answer