Question

To determine the right amount of a certain public good to provide, the government of Wakanda decides to survey its residents about how much they value the good. It will then finance the public good provision by taxes on residents. Describe a tax system that woul lead residents to underreport their valuations. Describe an alternative system that could lead residents to overreport their valuations.

Answer 1

Tax System:- Tax System is a legal system for estimate and collecting tax. The three main categories of tax system are:-

1. Regressive.

2. Proportional.

3. Progressive.

Sales Tax:- The use of the sales tax may lead Wakanda residents to under report the value of the product. A sales tax is a consumption tax accepted by the government on the sale of goods and services. A conventional sales tax is collected by retailer and passed on to the government. With the sales tax, the government will accept the revenue one a product sells, and the end-seller of the product who gets taxed. If the good does not make a sale, then the government fails to get the report. So this will give an underreport on how precious the good is to its consumers.

Value Added Tax:- On the other hand, the Value Added Tax may guide the residents to over report on the good. It is a tax on the amount by which the value of a good has been increased at each stage of its production.