Let us consider two flat rate tax regimes - a proportional tax and a progressive tax with

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Question:

Let us consider two flat rate tax regimes - a proportional tax and a progressive tax with a lump sum subsidy for the low-income earners below an income threshold.

a) Which tax regime should the government choose if the aim of the government is to maximise revenue receipts. Explain with the help of a well-labelled diagram. (5 marks

b) Does the tax regime identified in (a) above contradict or align with the taxation practice in modern mixed economies like Australia and USA? Explain. (5 marks)

Question 2: 10 marks

As per the Stage 3 tax cuts, the Government will increase the top threshold of the 32.5 per cent tax bracket from $120,000 to $200,000, removing the 37 per cent tax bracket completely from 1 July 2024. The plan means that around 94 per cent of all taxpayers are projected to face a marginal tax rate of 32.5 per cent or less in 2024-25. This is equivalent to decreasing the marginal tax rates for the 'top-incomes' or the 'rich'. Is this a Pareto improvement move? Explain the economic rationale with the help of a well-labelled diagram. (5 marks for diagram and 5 marks for explanation)

Question 3: 10 marks A natural monopoly represents instances of market failure, but this may alone does not justify the outright public ownership. Instead, the public sector can regulate natural monopolies to meet its desired objectives.

a) Explain with the help of a well-labelled diagram how the public sector can regulate a natural monopoly in line with the first-fundamental theorem of welfare economics (i.e., achieving the first-best market outcome). Discuss the efficiency consequences. (5 marks)

B)What would the second-best regulation of the natural monopoly by the public sector involve? You can use the same diagram as in part (a) above to answer this question. In your explanation, also mention why a second -best regulation is still socially desirable than no regulation or any removal of regulation (i.e. deregulation). (5 marks)

Question 4: 20 marks

A tax on interest income that does not eventually affect the amount of savings is non-distortionary. Do you agree or disagree with this statement? Explain. (5 marks)

Explain an example each of informational asymmetry problems pertaining to 'moral hazard' and 'adverse selection' facing the Australian public health care and Australian private health care respectively. You just need to provide 2 examples in total (one on 'moral hazard' and the other one on 'adverse selection'). (5 marks)

Despite the national parks always operating below their full capacity; they usually attract some entrance fees. The charging of entrance fees, however, does not create a deadweight loss. Do you agree or disagree? Explain with the help of a clearly well-labelled diagram. (5 marks)

Tax credit versus tax deductibility of expenses - Which instrument would the government of a modern mixed economy would choose if it aimed at addressing important distributions issues like income inequality? Explain. (5 marks)