Question

1. Assuming a perfectly efficient and benevolent government (use your imagination!) that spends tax revenue to provide public services, please make one economic argument for and against a high-tax society, and one economic argument for and against a low-tax society. Please note that this isn't a political debate course, so please keep your answers in terms of economic concepts (consumer/producer surplus, utility, dead weight loss, etc.).

2. Working on a farm in the U.S., my family's labor and capital costs are higher than in other developing countries, but not as high as in other countries with more limited agricultural resources. As a result, our cost of production of wheat, for example, is $4 per bushel, whereas China might be able to produce wheat for $3 per bushel, and Great Britain can produce wheat at $5 per bushel. Please describe what would happen to U.S. producers and consumers if 1) international trade was prohibited; 2) a free trade agreement was signed with both countries for wheat; and 3) the U.S. imposed a $3 tariff per bushel of imported Chinese wheat; and 4) a $3 subsidy was given to Great Britain producers (lowering their cost of production to $2).

3. Based on your answer to (2) above, review the arguments against international trade on Chapter 9 slides 21-24 and describe which one(s) of these arguments could be made against international wheat trade, from the perspective of U.S. producers. (you do not need to provide an answer for each of the four scenarios, you only need to consider the outcomes of international trade that are detrimental to U.S. producers).

4. Based on your answers to (2) and (3) above, what arguments could you make for international wheat trade, from the perspective of U.S. consumers? (you do not need to provide an answer for each of the four scenarios, you only need to consider the outcomes of international trade that are beneficial to U.S. consumers).

Answer 1

Ques 1

Economists, whatever their philosophy, will in general contradict high marginal tax rates for one awesome financial explanation: what they call deadweight misfortune. Besides, a generous minority of economists, including myself, restricts high marginal tax rates on philosophical grounds. Likewise intriguing is that most of Americans, on the off chance that they saw how high are the tax rates that high-pay Americans pay, would support significantly curtailing government expenditure rates on the top workers.

Economists frequently concoct unwieldy terms to depict significant ideas. Be that as it may, deadweight loss isn't one of them. Or maybe, it delightfully portrays one of the enormous damages from taxation. The deadweight misfortune from taxes is the misfortune forced on some that isn't an addition to anybody. In this way, for instance, an ordinary gauge of deadweight misfortune from taxes is 30% of income raised. That implies that if the government takes $1 million in extra taxes, there is an extra $300,000 cost forced on major parts in the economy.

Where does this deadweight misfortune originate from? It exists since individuals attempt to keep away from taxes. In this way, for instance, an expansion in the marginal tax rate may make individuals work less. Or on the other hand it may make them purchase a more costly house with the goal that they can deduct the extra enthusiasm on the home loan. Those are only two of the manners in which individuals can change. They may likewise sidestep taxes by downplaying salary or exaggerating costs and allowances. For what reason do we call the outcome deadweight misfortune? Since for each situation, the tax framework gives individuals a motivation to accomplish something that they would not have decided to do at a lower tax rate. The expanded tax rate makes them participate in conduct that in any case would be wasteful for them.

This can best be illustrated with an extraordinary theoretical model. Envision that the federal government forces a $2,000 extra tax on everybody, except gives them an exit plan: they can evade the tax on the off chance that they fly to Alaska and back. For the individuals who might have traveled to Alaska in any case, there is no deadweight misfortune. Be that as it may, for the individuals who might not have, there is a deadweight misfortune. However long the expense of traveling to Alaska—including the expense of your time short any "disvalue" you put on going to Alaska—is under $2,000, you will do it. Envision that the expense is $1,900. At that point you will fly there, and the deadweight misfortune from your alteration will be an astounding $1,900.

The way that taxes cause individuals to change in accordance with keep away from a few or every one of them is one reason that numerous economists restrict high tax rates.

Furthermore, here's the kicker. A hypothesis in financial matters says that the deadweight misfortune from a tax is corresponding not to the tax rate, yet to the square of the tax rate. Consider the 37 percent top federal tax rate. A few economists, for example, MIT's Peter Diamond and UC Berkeley's Emmanuel Saez, have upheld that it be raised to 70 percent or higher. To cause the numerical straightforward, to envision that the Congress and President were to twofold it to 74 percent. The deadweight misfortune wouldn't twofold. It would fourfold.

During the 1970s, when the top marginal tax rate in the United States was 70%, financial specialist Art Laffer drew his celebrated Laffer Curve. He demonstrated that tax rates could be high to the point that cutting them would really expand income and raising them could diminish income. Furthermore, regardless of whether raising tax rates doesn't diminish income, what's obvious from both essential financial matters and exact investigations is that raising tax rates by x percent will raise tax incomes by not as much as x percent. Why? This is a result of the modifications individuals make to dodge taxes.

Thus, for instance, consider a high-salary Californian who is as of now paying 50.3 pennies in federal and state taxes on each extra dollar earned, which implies that he's keeping 49.7 pennies. At that point envision that the promoters of higher tax rates get their direction and raise his federal tax rate to 70 percent. Presently he's paying 83.3 pennies on each extra dollar earned and keeping just 16.7 pennies. Set aside the wide range of various ways he may change, and consider only his choice about the amount to gain. His motivation to win an extra dollar has tumbled from 49.7 pennies to 16.7 pennies, a drop of 66 percent.

There have been studies to propose that high marginal tax rates don't imperil development, and the Eisenhower period US top rate of 91% is regularly refered to as proof that one ought to in reality wool the rich to finance welfare. An exploration concentrate by Peter Diamond and Emmanuel Saez of MIT and University of California at Berkeley, individually, has even suggested that the US raise its top marginal tax rate to 73%.

The issue with these contentions is that they are being universalized without setting. In the event that the US and Europe can raise taxes without speculators making a statement, it is on the grounds that they are internationally amazing and their governments can force their laws on littler nations and tax safe houses. Consider how effectively Indians have been compelled to agree to the US Foreign Account Tax Compliance Act, however the US has no purview over Indian citizens. Similarly, authoritarian nations can uphold high rates. Think about the instance of China, where budgetary suppression is the standard and the state can secure assets from anybody with its capacity to follow pretty much every resident in each movement.