1. Most economists agree that taxes should be designed with broad bases and rela
ID: 1122578 • Letter: 1
Question
1. Most economists agree that taxes should be designed with broad bases and relatively low tax rates – so-called BBLR. Explain why low tax rates and comprehensive tax bases lead to economically efficient taxation. [First, define what is meant by economically efficient taxation.]
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2. On the other hand, some tax deductions, such as charitable deductions, produce social benefits and warrant deducting them from the individual income tax. Explain the inframarginal revenue losses and the marginal gains from charitable tax deductions.
Explanation / Answer
Most economists agree that taxes should be designed with broad bases and relatively low tax rates – so-called BBLR. Low tax rates and comprehensive tax bases lead to economically efficient taxation Economically Efficient taxation is the type of taxation which does not hurt the economic decision making of both producer and consumer and does nlot result in deadweightloss which means that it is the taxation which results in efficient allocation of resources.
Low tax rates and comprehensive tax bases lead to economically efficient taxation mainly because it results in maximum tax revenue collection and it is considered as progressive taxation. Imposing high tax rates results in people working less because of higher taxes.
Some tax deductions, such as charitable deductions, produce social benefits and warrant deducting them from the individual income tax. The inframarginal revenue losses and the marginal gains from charitable tax deductions. The inframarginal impact is the tax savings given to those who would have donated if the charitable tax incentives had not been adopted. The marginal gain is the expenditure on charity by the person who was given tax incentive. Inframarginal revenue losses are good if the expenditure on charity is more as compared to the loss in tax revenue by giving tax incentive.
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