Question

Income Taxes

a. What is comprehensive income? What is income-in-kind?

b. Taxes on income do not necessarily result in the same labor supply outcome for every worker. Do you agree with this statement? Explain your answer using graphs showing the income and substitution effects.

c. Explain the paradox that the income tax generates excess burden even if the labor supply curve is perfectly inelastic. In explaining your answer, highlight the difference between the regular (perfectly inelastic) supply curve and the compensated labor supply curve.

d. Consider the case of an upward sloping supply curve.

Show on a graph: a. The market equilibrium wage rate and labor supply before the imposition of income tax.

b. The market equilibrium wage rate and labor supply after the imposition of income tax.

c. The excess burden of the income tax using the regular supply curve.

d. The income tax incidence e. Does the regular supply curve provide a good estimate of the excess burden of the tax? Why or why not? f. Does the change in the number of hours worked as provided by the compensated labor supply curve exceed the change under the regular supply curve?

Answer 1

Ans (1)- Comprehensive income refers to the statement of all income and expenses which are recognized during a specified period. The statement includes the revenue, finance costs, tax expenses, discontinued operations, profit share and profit/loss. Most firms report comprehensive income in a separate statement from income resulting from owner changes in equity but have an option of providing information in a single statement.

Income in kind refers to an income other than the money income. In other words, Non-cash payments received in exchange for services rendered or in lieu of a cash contribution. It can come in the form of provisions, such as free rent, free meals, form of property, or an exchange of services. It also includes employee benefits and government-provided goods and services such as toll-free roads, food stamps, public schooling, or socialized medicine.