Question

1. Are taxes on tobacco, gasoline, and alcohol, Progressive, Proportional, or Regressive? Why do you think they are?

2. Why should the federal government not be required to balance its budget while state and local governments are?

Answer 1

. 1. Goods like the one mentioned (tobacco, gasoline, alcohol) are popularly called as sin goods in economics. The taxes on them are considered to be regressive. This is because the tax liability of these goods reduces with increase in income. These goods are infact a source of huge tax revenue for the governments. This is because their consumption is inevitable for those who consume them regularly making their demand inelastic.

2.The federal government is not required to balance its budget due to the following reasons:

-It can use budget deficit as a cyclical tool to moderate the economy. For example during recession a rise in budget deficit can raise overall expenditure of the economy and increase output (Keynesian concept of multiplier)

-In case of budget deficit, the federal government can easily borrow from various sources

-The activities of federal government of keeping a deficit are not questionable by the state or local governments but vice versa is not true