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Chapter 12

The Design of the Tax System

Educators


Problem 1

The information in many of the tables in this chapter can be found in the $\textit{Economic Report of the President}$, which appears annually. Using a recent issue of the report at your library or on the Internet, answer the following questions and provide some numbers to support your answers. ($Hint$: The website of the Government Printing Office is http://www.gpo.gov.)
a. Figure 1 shows that government revenue as a percentage of total income has increased over time. Is this increase primarily attributable to changes in federal government revenue or in state and local
government revenue?
b. Looking at the combined revenue of the federal government and state and local governments, how has the composition of total revenue changed over time? Are personal income taxes more or less important? Social insurance taxes? Corporate profits taxes?

Yi Chun L.
Washington University in St Louis

Problem 2

Suppose you are a typical person in the U.S. economy. You pay 4 percent of your income in a state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employee shares combined). You also pay federal income taxes as in Table 2. How much tax of each type do you pay if you earn \$30,000 a year? Taking all taxes into account, what are your average and marginal tax rates? What happens to your tax bill and to your average and marginal tax rates if your income rises to \$60,000?

Yi Chun L.
Washington University in St Louis

Problem 3

Some states exclude necessities, such as food and clothing, from their sales tax. Other states do not.
Discuss the merits of this exclusion. Consider both efficiency and equity.

Kaylee M.
Numerade Educator

Problem 4

When someone owns an asset (such as a share of stock) that rises in value, he has an "accrued" capital gain. If he sells the asset, he "realizes" the gains that have previously accrued. Under the U.S. income tax system, realized capital gains are taxed, but accrued gains are not.
a. Explain how individuals' behavior is affected by this rule.
b. Some economists believe that cuts in capital gains tax rates, especially temporary ones, can raise tax revenue. How might this be so?
c. Do you think it is a good rule to tax realized

Kaylee M.
Numerade Educator

Problem 5

Suppose that your state raises its sales tax from 5 percent to 6 percent. The state revenue commissioner
forecasts a 20 percent increase in sales tax revenue. Is this plausible? Explain.

Kaylee M.
Numerade Educator

Problem 6

The Tax Reform Act of 1986 eliminated the deductibility of interest payments on consumer debt (mostly credit cards and auto loans) but maintained the deductibility of interest payments on mortgages and
home equity loans. What do you think happened to the relative amounts of borrowing through consumer
debt and home equity debt?

Yi Chun L.
Washington University in St Louis

Problem 7

Categorize each of the following funding schemes as examples of the benefits principle or the ability-to-pay principle.
a. Visitors to many national parks pay an entrance fee.
b. Local property taxes support elementary and secondary schools.
c. An airport trust fund collects a tax on each plane ticket sold and uses the money to improve airports and the air traffic control system.

Kaylee M.
Numerade Educator