1- The impact of tax on markets and welfare distribution. [70 points, 10 points each part]- Use supply and demand diagrams to answer the following questions. Draw new diagrams for answers to each part.
a- Show that regardless of who the tax is levied on (consumers or producers), a tax increase the price paid by consumers, decrease the price received by producers, and make the market smaller compared with a free market.
b- Show that regardless of who the tax is levied on (consumers or producers) the burden of tax will be shared between consumers and producers
c- Show that the burden of tax falls more heavily on relatively more inelastic side of the market.
d- Show that the greater the elasticity of supply and demand, the greater the deadweight loss of a tax.
e- Show that the greater the elasticity of supply and demand, the smaller the tax revenue generated by a given tax.
f- Show that, fixing elasticity of supply and demand, the impact of an increase in tax rate on tax revenue depends on whether the initial tax rate is “too low” or “too high”.
g- Show that the relatively more elastic side of the market benefits relatively less from a given tax cut.
2- The impact of payroll tax cut– [20 points, 15 points each]
[Hint: apart from the week 7 material, read “the Deadweight loss debate” on page 162-163 of the book before answering]
The most important taxes in the US economy is tax on labor. The Social Security tax, the Medicare tax, and the federal income tax are payroll taxes (see the budget infographics for more information). For a typical worker, if all forms of labor taxes are added together, the marginal tax rate – the tax on the last dollar of earning – is about 40 percent.
a- Use a labor supply and demand diagram to show that a labor tax places a wedge between the wage that firms pay and the wage that worker receive, and causes unemployment. On your graph show the deadweight loss and the tax revenue caused by tax.
b- Assume that most workers work fulltime regardless of the wage; and employers have access to cheap machines. Show that in this situation, the workers benefit relatively more from a payroll tax cut.
re drinking contaminated water on a daily basis, also, there have been a loss of natural grasslands and forests due to the expansion of industry and agriculture, a loss of topsoil, vegetation, lakes (15% since the 1950’s) and wetlands (26% since the 1950’s), shortages of water due to drought and insufficient irrigation systems and inadequate disposal of household and industrial waste (20% of solid waste/year is being properly disposed of). In order to battle these environmental problems, the Chinese government has set targets for reducing pollution levels by committing US$6.6b in 2015 in new spending, including the complete shutdown of coal fired power stations. China also signed the UNFCCC’s Paris Agreement in 2015 and agreed to peak its CO2 emissions in 2030 and launch a national cap and trade emissions programme in 2017. The Australian government on the other hand, has a range of environmental policies to minimise the impact of government operations on the environment. There are also agency measures and targets for carbon emissions, energy, waste and resource use, as well as set mandatory environmental standards for incorporating sustainability into government procurements. However, like China, they seem to be needing some rethinking or modification. Australia’s emissions from fossil fuels and industry continue to rise, and based on the most recent quarterly inventory, are now 6% above 2005 levels and increasing at around 1% since 2014. Under current policies and taking into account the previous increase in levels of carbon emissions, Australia is headed for an increase of 9% above 2005 levels by 2030, rather than the 15-17% decrease required to meet the Paris Agreement target. Furthermore, as seen in the stimulus, the Australian Government has set a target to ‘reduce emissions by 26-28% below its 2005 levels by 2030 through a credible policy suite that is already reducing emissions, encouraging technological innovation and expanding our clean energy sector.’ Thus, to conclude, Australia ratified the Paris Agreement on 6 November 2016. Its Nationally Determined Contribution (NDC), includes a target of reducing GHG emissions, including land use, land use change and forestry (LULUCF), by 26–28% below 2005 levels by 2030. However, current policies are projected to increase GHG emissions excluding LULUCF by about 9% above 2005 levels by 2030, relating highly to China’s extreme levels of CO2 emissions.>GET ANSWER