Question

Answer completely and show work

1. Exempting the interest on state and local government bonds from federal income taxation is the lowest cost way for the federal government to subsidize state and local borrowing costs." Evaluate this statement.

2. "If the Baumol hypothesis is correct concerning local government finances, and if the price elasticity of demand for local services is inelastic, then we are in trouble--eventually, spending for education, police and fire protection, and sanitation will require half of our incomes." Evaluate this concern. What changes could occur to prevent this from happening?

Answer 1

Answer:

(1) Evaluation of th given statement is:

US federal law exempt the interest on state and local government bonds from federal income taxation. It is a form of subsidization.

It is estimated that Federal government sacrifices revenue worth $ 700 Billion every year due to exemptions offered to state and local government.

According to economists, the exemption of income from bond is best way to fund infrastructure at local and state level. Infrastructure development is critical for licking rapid growth rate.

Further, needs at local and state level can be easily identified and addressed by these local authorities,

Thus government must offer incentives to address these issues in most efficient way.

Success of these exemption depends on the way saved amount is utilized for development of local economy.

(2) Evaluation of the given statement and changes that could occur to prevent this from happening are:

Baumol hypothesis

In the case of rapid technological progress, the cost of manufactured goods, smartphones, cars, bananas, t-shirts fall but the cost of services increases.

These are labour intensive services. Example, healthcare, schooling, haircuts, childcare, legal services, coaching, etc.

Over the decades, prices of manufactured goods have fallen while healthcare & education services have now become even more expensive.

The cost rises as the wages in other sectors rise.

The rising price of services is inevitable in case of rising affluence.

Lifestyles cannot be maintained without this.

Reduction in prices of manufactured goods comes due to increased efficiency.