Economics 512 First Exam Study Questions Fall 2013

Economics 512First Exam Study QuestionsFall 2013(Subject to revision)Most of these questions can be answered in a paragraph or two. Some questions may beanswered more easily using a graph or graphs.1. Show the short-run impact of a $2 per unit excise tax imposed on firms in acompetitive industry. (Assume the industry is in equilibrium before the tax wasimposed.)How would the long-run results differ?What is the impact on efficiency of the tax?2. Give a brief rationale for the following provisions of the individual income taxlaws:a. exemptions.b. deductions for charitable contributions to colleges.c. deductions for large medical expenses.d. deductions for property taxes paid to local governments.3. If we had a truly comprehensive individual income tax (based on the Haig-Simonsapproach), there would be no reason to have a corporate income tax or estate andgift taxes. Explain and evaluate this statement. For use on next exam.4. Explain how inflation can create problems in regard to the taxation of the income,especially in regard to the income from capital (e. g., interest, dividends, andcapital gains). How might these problems be dealt with?5. How does the ability-to-pay philosophy of taxation differ from the benefitprinciple? What problems are encountered in implementing both these taxphilosophies?6. If the same amount of revenue is raised, a selective tax on a small number ofgoods is likely to have a greater excess burden as compared to a lower rate tax ona broader range of goods (with similar demand curves). Agree or disagree andexplain.7. Briefly review the possible impacts of income taxation on work effort. Summarizethe results of empirical studies of the question.8. Briefly explain why the private market might fail to allocate resources efficientlyin the following cases:a. Contributions to a charity to fight cancer.b. Inoculation against contagious diseases.9. Small countries that are allied with the United States tend to spend a smaller shareof their national income for national defense as compared with the United States.Provide a plausible explanation for this situation.10. When someone travels on business in the U. S., the traveler can usually deduct thehotel expenses, but can deduct only half the cost of meal expenses.Does this tax policy make sense from a Haig-Simons perspective? Explain.11. Two students have identical high school records and test scores. After college,one student becomes an accountant and the other a social worker. The socialworker will likely pay less in income taxes than the accountant.Will this violate the principle of horizontal equity? Explain. (Hint: Your answerdepends on the choice of the measure that is used in deciding whether people arethe same or different for tax purposes.) Will this create an inefficiency or excessburden?12. Assume the government plans to offer a transportation subsidy through the taxsystem for the costs of commuting to work. What would be the implications ofmaking these expenditures deductible for tax purposes compared to offering a 25percent tax credit for the expenses?13. If the government moved to a Haig-Simons definition of income, wouldemployers be more or less likely to offer employer provided benefits such ashealth insurance?14. Why can some taxes that appear to be regressive in terms of current income bethought of as progressive from a lifetime (or permanent) income standpoint?15. Luxury goods often have much higher elasticities of demand than more basicstaples such as rice and potatoes. If taxes are to be imposed on these goods, fromthe standpoint of optimal taxation, what might be the relative rates on the twotypes of goods? What might be the problem of this approach?16. The impact of a proportional income tax on work effort is theoreticallyambiguous. Explain.How might the different responses to increased taxes impact the excess burden ofthe tax?17. Provide an argument for making child care costs tax-deductible for workingfamilies. Should the tax subsidy be also provided for non-working families forpurposes of horizontal equity?18. The impact of a proportional income tax on the return on savings is theoreticallyambiguous. Explain.Show the potential excess burden from such a tax.19. Optimal tax theory provides a detailed guideline for real world tax policy.Agree and disagree and explain.20. Why are fixed limits on pollution emissions for each firm likely to be aninefficient means of reducing pollution compared to a Pigouvian tax?21. Would the sales of pollution rights or certificates be an efficient means ofallocating a given amount of pollution? Explain.22. What are the essential differences between pure public goods and pure privategoods?Compare the conditions necessary for efficiency for a pure public good with aprivate good.23. Why are most taxes likely to cause losses in efficiency? Show.24. Review some of the important explanations or rationales for and againstprogressivity in taxation. Which of these are positive and normative arguments?

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