Question

In: Economics

In 2012, presidential candidate Mitt Rommey proposed extending the cut in marginal income tax rates passed...

In 2012, presidential candidate Mitt Rommey proposed extending the cut in marginal income tax rates passed during the Bush administration. Explain why theory alone cannot predict how labor supply would be affected if this proposal were implemented. If there were no political or legal impediments to doing so, how could you design an experimental study to estimate the impact of lower marginal tax rates on labor supply?( Says theoretical approach, what the process and the consequences are, and premise)

Solutions

Expert Solution

A change in the marginal tax rate changes the individual's net wage. This generates both an income effect and a substitution effect. As long as leisure is a normal good, these effects work in opposite directions. Hence, one cannot tell a priori whether labor supply increases or decreases. If there were no political or legal impediments, an experimental study could be conducted in which a control group confronts the status quo, and an experimental group faces the new tax regime. Other things that affect work effort would impact both the control group and the experimental group, so any difference in work effort between the two groups could be attributed to the change in marginal tax rates.

Primarily through the supply side. High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. But tax cuts can also slow long-run economic growth by increasing deficits. The long-run effects of tax policies thus depend not only on their incentive effects but also their deficit effects.


Related Solutions

Marginal tax rates were cut substantially during the 1980s, and although rates were increased in the...
Marginal tax rates were cut substantially during the 1980s, and although rates were increased in the early 1990s, the marginal rates applicable in the highest income brackets were still well below the top rates of the 1960s and 1970s. How did the lower rates of the 1980s and 1990s affect the share of taxes paid by high income taxpayers? Were the lower rates of the 1980s and the 1990s good or bad for the economy?
In 1986, the U.S. federal income tax system changed marginal tax rates so that the marginal...
In 1986, the U.S. federal income tax system changed marginal tax rates so that the marginal tax rate fell from 50 to 33 percent. Given the fact that employment based health insurance is tax exempted, how will this affect the demand for health insurance for employees with compensation of $6000 a month and cost of insurance being $100? Support your answer with calculations.
Explain why the tax cut that was passed in 2017 is set to expire in 2016.
Explain why the tax cut that was passed in 2017 is set to expire in 2016.
1. A tax cut to the tax rates may not stimulate the economy if: a)It is...
1. A tax cut to the tax rates may not stimulate the economy if: a)It is permanent and increases permanent disposable income b) decisions for consumption are based only on current income instead of permanent income c) it is distributed evenly in the population of the economy d) it is temporary and thus doesn't change the permanent disposable income e) It is too big 2. An economy that is headed into recession decides to start an expansionary fiscal policy. 6...
40. To reduce income inequality, should the marginal tax rates on the top 1% be increased?
40. To reduce income inequality, should the marginal tax rates on the top 1% be increased?
Discuss US fiscal policy. Including taxes, presidential candidate tax policies, real estate taxes, sales tax and...
Discuss US fiscal policy. Including taxes, presidential candidate tax policies, real estate taxes, sales tax and value-added tax. Discuss how taxes play a role in US politics. How do these shape elections and Presidential campaigns?
Define and Discuss Average and Marginal Tax rates
Define and Discuss Average and Marginal Tax rates
A big tax on sugary drinks in Mexico has cut consumption. Sellers passed on the entire...
A big tax on sugary drinks in Mexico has cut consumption. Sellers passed on the entire tax in higher prices to the consumers of these sugary drinks. The largest consumers of these drinks are the poor who suffer from diabetes and obesity. Source: The New York Times, October 19, 2015 a. What is the elasticity of demand for sugary drinks? Why? b. What is the elasticity of supply of sugary drinks? Why? c. Is the tax on sugary drinks progressive...
8. A. President Trump’s tax cut passed in December and the new federal budget has large...
8. A. President Trump’s tax cut passed in December and the new federal budget has large increases in spending, what type of fiscal policy (Expansionary or Contractionary) has occurred. Defend your answer. B. Since the Trump tax cut has taken effect what has happened to the deficit in the federal budget? Has it increased, decreased or remained the same? Use numbers to defend your answers. SEE QUESTION 5 URL 30 points ((Go to the following link to find the numbers....
How can Congress raise or lower effective tax rates without changing marginal tax rates?
How can Congress raise or lower effective tax rates without changing marginal tax rates?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT