Theory of optimal income taxation : If there are groups in the population

Subject: Economics    / General Economics

Question 1

If there are groups in the population who differ in their labor supply elasticity, they should be taxed at different rates.” Justify this in terms of the theory of optimal income taxation. Wives of working husbands are believed to have more elastic labor supplies than other workers. Should they have a different income tax rate than other people?

Question 2

Earlier, we noted that consumption at different dates could be interpreted just like consumption of different commodities at the same date. What do the results on optimal taxation imply about the desirability of taxing interest income? (Hint: Recall that the price of consumption tomorrow relative to the price of consumption today is just 1/1 + r , where r is the rate of interest)

Question 3

Explain why it might be desirable to have a regressive tax structure, even if the social welfare function is utilitarian, when general equilibrium effects of taxes are taken into account. Would it ever be desirable to impose a negative marginal tax rate on very- high- income individuals?

Question 4

If you believed that those who were more productive in earning income also had a higher marginal utility of income (they were more efficient in consumption), what would that imply for the design of tax structures?

Question 5

Under what circumstances will an increase in the progressivity of the tax schedule increase the degree of before tax inequality?

Question 6

To what extent do you think that indifferences in views concerning how progressive our tax structure should be reflecting differences in values, and to what extent do they reflect differences in judgments concerning the economic consequences of progressivity (deadweight loss, shifting)?

Question 7

One argument sometimes made in favor of the use of commodity taxation rather than income taxation is that people do not accurately perceive the amount they pay in commodity taxes. They will object less to a 20 % income tax supplement by a 10 % sales tax than to a 30 % income tax. Do you think this is true? If it is, what do you think it implies about the design of tax policy?

Question 8

Explain why the EITC may actually lower total work effort of the poor even if it increases labor force participation. (Hint: Focus separately on those below and above the maximum benefit level.)