Public finance and taxation questions and answers

There are four questions included in this section. You should select three questions to answer. If all four questions have been answered, only the first three will be graded. You should begin each new question on a new page. If you are doing calculations, show your work. Remember that grammar counts and your grade will depend on the quality of your answer, not the quantity. Each question is worth twenty points.

1. Suppose that the national government creates a grant program to provide funds to all local governments and, as a result, that all local governments nationally reduce property taxes proportionally. Discuss the economic effects of this property tax change. Which types of individuals are expected to benefit? Will the property tax change lead to a more or less progressive tax structure.

2. "It would be unfair to tax the sale of medical or legal services because effectively that would be taxing people's misfortunes." Discuss this viewpoint. Would the same principle apply to the sale of car repairs? What about the purchase of a fire extinguisher or a child's car seat?

3. Suppose that a taxpayer is in the 15percent tax-rate bracket for the federal individual income tax and faces a 5 percent state income tax rate.

a. If the taxpayer cannot deduct either tax against the other, what is the taxpayer's combined marginal tax rate? What is the marginal rate if the taxpayer itemizes federal deductions and deducts the state tax? What if there was reciprocal deductibility? (Show your work.)

b. Now recalculate all three combined marginal tax rates assuming that the state tax rate is 10 percent. How do they change? (Show your work.)

4. "If our state has to raise taxes, it should increase the corporate income tax. That way a good part of the tax will be paid by consumers in other states, not just taxpayers in this state." Evaluate this position.