Explain the following statement: "People hate taxes primarily because of income effects while economists hate taxes primarily because of substitution effects."
What will be an ideal response?
Substitution effects are what gives rise to deadweight losses from taxes -- and whenever there are deadweight losses, there should at least in principle be a way to make some people better off without making anyone else worse off. Put differently, substitution effects are what makes price-distorting taxes inefficient, and economists don't like inefficiencies. But even if there were no substitution effects -- even if all taxes were lump sum (and not price-distorting) taxes, people would dislike taxes because they have to write checks to the government and can't consume as much as they could otherwise. So people will hate taxes even if there are only income effects.
You might also like to view...
What role does foreign direct investment play in international transfer of technology?
What will be an ideal response?
The Rule of 70, as applied to real GDP growth, can be used to find the
A) real GDP growth rate necessary to double growth. B) growth rate of real GDP. C) number of years it takes for the level of real GDP to double. D) population growth rate necessary to double the GDP growth rate. E) number of years it takes for the growth rate of real GDP to double.
If a seller can sell 5 units at $8 each and can sell a 6th unit separately for $7 (the people willing to pay $8 don't learn about the reduced price), the marginal revenue from selling the 6th unit is
A) $47. B) $7.50. C) $7. D) $2. E) none of the above.
The argument that import restrictions save jobs and promote prosperity fails to recognize that:
a. there are no secondary effects of import restrictions. b. import restrictions will lower prices in the protected industries. c. import restrictions cannot create jobs in any industries. d. U.S. imports provide people in other countries with the dollars power required for the purchase of U.S. exports.