16.1 Use
a circular flow diagram to show how the allocation of resources and the
distribution of income are affected by each of the following government
actions. L01a. The construction of a new high school.b. A 2-percentage-point reduction of the corporate income tax.c. An expansion of preschool programs for disadvantaged children.d. The levying of an excise tax on polluters.
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16.2 What
do economists mean when they say government purchases are “exhaustive”
expenditures whereas government transfer payments are “nonexhaustive”
expenditures? Cite an example of a government purchase and a government
transfer payment. L01
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16.3 What
is the most important source of revenue and the major type of
expenditure at the Federal level? At the state level? At the local
level? L01
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16.4 Distinguish
between the benefits-received and the ability-to-pay principles of
taxation. Which philosophy is more evident in our present tax structure?
Justify your answer. To which principle of taxation do you subscribe?
Why? L02
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16.5 What
is meant by a progressive tax? A regressive tax? A proportional tax?
Comment on the progressivity or regressivity of each of the following
taxes, indicating in each case where you think the tax incidence lies: (a) the Federal personal income tax, (b) a 4 percent state general sales tax, (c) a Federal excise tax on automobile tires, (d) a municipal property tax on real estate, (e) the Federal corporate income tax, (f) the portion of the payroll tax levied on employers. LO3
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16.6 What
is the tax incidence of an excise tax when demand is highly inelastic?
Highly elastic? What effect does the elasticity of supply have on the
incidence of an excise tax? What is the efficiency loss of a tax, and
how does it relate to elasticity of demand and supply? L03
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16.7 Given the inelasticity of cigarette demand, discuss an excise tax on cigarettes in terms of efficiency loss and tax incidence. LO3
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16.8 ADVANCED ANALYSIS Suppose the equation for the demand curve for some product X is P = 8 –.6Q and the supply curve is P = 2 + .4Q. What are the equilibrium price and quantity? Now suppose an excise tax is imposed on X such that the new supply equation is P = 4 + .4Q.
How much tax revenue will this excise tax yield the government? Graph
the curves, and label the area of the graph that represents the tax
collection “TC” and the area that represents the efficiency loss of the
tax “EL.” Briefly explain why area EL is the efficiency loss of the tax
but TC is not. LO3
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16.9 Is
it possible for a country with a regressive tax system to have a
tax-spending system that transfers resources from the rich to the poor? L04
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16.10 LAST WORD
Does a progressive tax system by itself guarantee that resources will
be redistributed from the rich to the poor? Explain. Is the tax system in the United States progressive, regressive, or proportional? Does the tax-spending system in the United States redistribute resources from higher-income earners to lower-income earners?
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