Public Finance
Fall, 2004
Kathryn Wilson
Due: Wednesday, November 17
Homework 5
1. On pages 23 to 28 of Taxing Ourselves the authors summarize important tax reforms that
occurred in the United States. In class, we used the five criteria from Chapter 17 (efficiency,
administrative simplicity, flexibility, political responsibility, and fairness) to evaluate various
types of taxes. Now I want you to analyze the tax reforms of 2001 and 2003 using these five
criteria. For example, did the tax reforms improve economic efficiency? What behavioral
effects would you expect? What would it have done to the administrative costs of collecting
taxes? Does it increase or decrease the amount of flexibility of the taxes or have no change? Did
it make the tax code more transparent? Did it make the tax code more fair?
2. There are 2 graphs attached.
a. For each graph, calculate the price and quantity if a $3 tax were imposed.
b. What is the efficiency loss ratio (efficiency loss ratio = deadweight loss  tax revenue) in
each case?
c. Who has the higher tax incidence in each case?
d. The Government is trying to design a tax policy to raise revenue by taxing these two
goods. Based on the graphs provided use the Ramsey Rule to guide them as to which good they
should tax more heavily and why. Should they put all the tax on one good and none on the other
good? Why?
3. There are 4 graphs attached.
a. In graph (a) draw consumer surplus and producer surplus at the equilibrium (no taxes are
imposed).
b. In graph (b) assume the government imposes a tax of $3 per unit. Draw the new
consumer surplus, producer surplus, tax revenue, and excess burden; what is the
efficiency loss ratio?
c. In graph (c) assume the tax is $6 per unit. Draw the new consumer surplus, producer
surplus, tax revenue, and excess burden; what is the efficiency loss ratio?
d. In graph (d) assume the tax is ad valorem of 50% of price. Draw the new consumer
surplus, producer surplus, tax revenue, and excess burden; what is the efficiency loss
ratio?
4. In chapters 3, 4 and 5 of Taxing Ourselves, the authors discuss taxes and fairness, economic
prosperity, and simplicity and enforcement. Please evaluate a flat tax (where everyone pays a flat
percent of all of their income in taxes with no deductions or exclusions) compared to the current
income tax system on the basis of these three sets of issues. Is a flat tax or the current income tax
system better in terms of fairness? in terms of economic prosperity? in terms of simplicity and
enforcement? Provide a thorough explanation for your answer that shows me that you
understand what each of these concepts means and can apply them to analyzing these two tax
systems.
Question 2a
$10
$9
$8
S
$7
Price
$6
$5
$4
$3
$2
$1
D
$0
0
10
20
30
40
50
60
70
80
90
100
Quantity
Question 2b
$10
$9
S
$8
$7
Price
$6
$5
$4
$3
D
$2
$1
$0
0
10
20
30
40
50
Quantity
60
70
80
90
100
Question 3b
$15
$14
$13
$12
$11
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
Price
Price
Question 3a
S
D
0
50
100
150
200
250
$15
$14
$13
$12
$11
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
300
S
D
0
50
100
Quantity
Price
Price
S
D
100
150
Quantity
250
300
Question 3d
$15
$14
$13
$12
$11
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
50
200
Quantity
Question 3c
0
150
200
250
300
$15
$14
$13
$12
$11
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
S
D
0
50
100
150
Quantity
200
250
300