Describe the effects that exemptions, deductions, and tax credits have on the income tax base, tax rates, and economic efficiency
What will be an ideal response?
A tax system that has numerous exemptions, deductions, and tax credits has a much narrower tax base than a broad-based income tax that treats all income equally. The narrowing of the tax base means that for any given level of revenue, tax rates need to be higher than if the base were broader. The welfare loss under a tax system with a narrow base is greater than under a broad-based tax system. Although all taxes are distortionary, the numerous trade-offs inherent in a tax system filled with exemptions, deductions and credits, entails far more distortion than under a broad based system.
You might also like to view...
Suppose that in Slovakia one unit of labor can produce either 16 tons of wheat or 32 tons of soy and in Poland one unit of labor can produce either 4 tons of wheat or 2 tons of soy. Given this information, which of the following statements is true?
A. Slovakia has a comparative advantage in producing neither wheat nor soy. B. Slovakia has a comparative advantage in producing both wheat and soy. C. Poland has a comparative advantage in producing soy but not wheat. D. Poland has a comparative advantage in producing wheat but not soy.
In the above table, the cross price elasticity of demand for good X with good Y when PY falls from $20 to $18 is
A) -2. B) 0. C) +1. D) -1.
Mathematically, the value of the tax multiplier in terms of the marginal propensity to consume (MPC) is given by the formula:
a. MPC ? 1. b. (MPC ? 1) / MPC. c. 1 / MPC. d. 1 ? [1 / (1 ? MPC)].
Which of the following is an example of a backward linkage?
a. A car industry creates a need for car dealerships. b. A compact disc industry creates a need for CD players. c. The development of a shoe industry creates a demand for a leather industry. d. An increase in the population increases the demand for food. e. New educational facilities improve the literacy rate of the population.