Tax and inequality a. The recent Republican tax plan sought to repeal estate tax

Question

Tax and inequality

a.       The recent Republican tax plan sought to repeal estate tax (inheritance tax). Who will benefit from this change? In fact, a number of countries have abolished inheritance tax in the last few decades. What would be your explanation for the fading of inheritance tax? (This tax was one of the key demands from the working class in the 19th century, remember, in communist manifesto, Marx and Engles argued for “Abolition of all rights of inheritance”).

b.      Using the theory of tax incidence, discuss the short term and long term incidence of increasing corporate income tax.

c.       Discuss whether deductions of education expenses and state/local taxes in personal income tax increase or decrease inequality.

d.      Use the data from World bank data (http://databank.worldbank.org). There is controversy regarding whether higher tax leads to equality or inequality. Do a simple scatterplot of the two factors (two axis: tax to GDP ratio, Gini coefficient) for 10 countries (you choose the countries) for any year. What do you think better describes the relationship between the two?

Explanation / Answer

a) Mostly rich pepoles will benefit from the repelment of the estate tax. Estate tax are taxed at the rate of around 40% however there is an exemption of first $5.49 million , which means a couple can leave their heirs as much as $11 miilon tax free, whcih means three are very few wealthier person who will be taxed, and annulment of the same will help those rich individuals. The estate taxes mostly hampers small run family business. Estate tax is one the most inefiicient features of current tax system. High compliance cost and distortions to economic activity led to fading away of inheritence tax

b) When a corporate tax increases, the added cost (tax) will be passed onto the customers and also the workers by freezing the hire or by reducing the bonuses/salary/lay off, etc which will autmatically affect their personal income and hence taxed to be paid thereon

c) Deduction of education expenses and state/local taxes in personal income increase inequality, as person who is wealthier and has paid higher amount in eudcation and estate tax is provided higher deduction and has to pay lower taxes in personal income and who are not has to pay higher income tax

d) Data not found

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