1. What does tax reform (under the 1986 label) do to the progressivity of the ta

Question

1. What does tax reform (under the 1986 label) do to the progressivity of the tax code?  

2. Did the 1986 tax reform include any lump sum taxes? Did it include all lump sum taxes?

3. Why do we consider eliminating tax deductions and raising marginal tax rates to have different properties in terms of economic efficiency?

4. In our model without externalities, why did we need to have a distortionary tax already present in the economy, to have welfare gains from raising another tax?

5. How do we show the effects of lump sum taxes in an edgeworth box?

6. If we have an equation for the PPF (which will not always be the case), what can we say about production efficiency?

7. Excess demand for a good is the “demand” minus the endowment. What is “demand?” What equations does it come from? In a two good model, how many equations do you need to find a person’s demand equation? What are they?

Explanation / Answer

1. Progressivity of tax refer to the system of tax, under which as income goes higher, the tax rate is increased. Now, yet the governemnt promoted that this tax reform would add to the progressivity of the taxation, but several independant estimates shows just the opposite, stating that government overestimated due to neglecting many factors. What we may see is, accounting the whole (in a period of 2 years), the top rate of was decreased, while the bottom rate was increased. This, anyhow, reduces the progressivity of the tax structure, indicatng that the government estimates of progressivity were actually overestimated.

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