Question

The state has decided to increase funding for public education. They are considering four alternative taxes to finance these expenditures. All four taxes would raise the same amount of revenue.”:

1. A sales tax on food.
2. A tax on families with school-age children.
3. A property tax on vacation homes.

Evaluate these tax options:

1. Taxes change incentives. How might individuals change their behavior because of each of these taxes? (
2. Rank these taxes from smallest deadweight loss to largest deadweight loss. Explain.
3. Is deadweight loss the only thing to consider when designing a tax system?Why- explain.

Answer 1

Answer)

A Sales tax on food;

It leads to increase in price of foods which results in loss of purchasing power. As food are non durable goods so their life span is short. This will shift the equilibrium price of food to downward which is directly related to loss of profit maximizing producers. Now individual has shorten their food basket due to imposition of sales tax. This is the most deadweight loss as it effects both household and private sector.

A tax on families with school age children

It leads to tax burden on a cenrtain types of families. This will promote discrimination in economy. It will further lead to poor demography as the gap between families with school age children and without school age children increase due to above. This will leads to promote negative behavior as it promotes demographic discrimination. And this had medium deadweight loss relative to other as it effects on the certain slab of the demography.

A property tax on vacation homes

It leads to the increase in rent of vacation homes and properties. It effects positively as the implication of this tax on vacation homes. So this is not a part of necessary consumption so it will not effect their consumption of necessary goods and services hence economy development not diminishes. The individuals will limit or control their expenses and this will results in fall of vacation homes demand. It has the least deadweight loss.

Deadweight loss is not only consider thing to desiging the tax system

It refers to the dynamic aspect of economy. Desiging of tax system not merely depends on the deadweight loss because the structure of economy different due to structure of demography, geographical conditions , resources available to that economy and the present condition ( stage of ecoonomy i.e. developing , underdeveloped and developed) of the economy.