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Tax Inefficiencies and Optimal Taxation (ch 20)

A. Taxation and Economic Efficiency

1. Graphical Approach

2. Elasticities Determine Tax Inefficiency

3. Determinants of Deadweight Loss

The formula for DWL is given by:

Two Lessons:1. DWL rises with __________________________________________________

2. DWL rises with __________________________________________________

The term marginal DWL refers to:

4. DWL and the Design of Efficient Tax Systems

a. preexisting distortions

b. progressive tax systems

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c. smoothing of tax rates over time

B. Optimal Commodity Taxation

1. Ramsey Taxation

The theory ofoptimal commodity taxation refers to:

The Ramsey Rule says the government should set taxes _______________ commodities so that the

____________ of marginal DWL to marginal revenue raised is ______________ across commodities.

2. Inverse Elasticity Rule

Two factors must be balanced when setting optimal commodity taxes:a. elasticity rule

b. broad base rule

3. Equity Implications of the Ramsey Model

C. Optimal Income Taxes

The theory ofoptimal income taxation refers to:

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1. A Simple Example

Assumptions:-

--

-

Under these assumptions, the optimal tax system is one that:

2. General Model with Behavioral Effects

In reality, taxation affects the size of the pie.

In designing optimal income taxes, the government needs to consider the effect of raising tax _______

on the size of the tax ____________.

An increase in the tax rate on labor income has 2 effects:-

-

The Laffer Curve says:

The goal of optimal income tax analysis is to identify:

An optimal income tax system reflects:

a. vertical equity

b. behavioral responses

D. Tax-benefit Linkages and the Financing of Social Insurance Programs

A tax-benefit linkage is:

1. Model

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2. Issues

a. If there is no inefficiency to providing a benefit, why doesnt the employer just do so withoutgovernment involvement?

b. When are there tax-benefit leakages?

c. What is the empirical evidence on tax-benefit linkages?