Question

In: Economics

1.Consider an ad valorem tax on a luxury good such as cigars. Suppose the current tax...

1.Consider an ad valorem tax on a luxury good such as cigars. Suppose the current tax rate is 75%. If the tax rate is increased to 100%, what will happen to government tax revenue?

Select one:

Government tax revenue will fall to zero

Government tax revenue will definitely decrease

Government tax revenue will likely decrease

Government tax revenue will likely increase

Government tax revenue will definitely increase

There is not enough information to tell

2.In Canada, income from capital gains receives special treatment. If the federal government eliminated the special treatment for income from capital gains:

Select one:

BC provincial government tax revenue would decrease

BC provincial government tax revenue would increase

BC provincial government tax revenue would be unaffected

There isn't enough information to tell

3.Consider the model of tax evasion that we learned in class, in which individuals may choose to underreport some amount of their income.

In this model, if government increases the penalties for tax evasion:

Select one:

Everyone will increase the amount of income that they underreport

Most (but not necessarily all) people will increase the amount of income that they underreport

Everyone will decrease the amount of income that they underreport

Most (but not necessarily all) people will decrease the amount of income that they underreport

There is not enough information to tell

Solutions

Expert Solution

Answer-1. Correct option is 'A'

Suppose the current tax rate is 75%. If the tax rate is increased to 100%, government tax revenue will fall to zero. The Laffer curve states that a theoretical relationship between rates of taxation and the resulting levels of the government's tax revenue. The Laffer curve states that if the tax rate are increased above a certain level, then the tax revenues can actually falls because higher tax rates discourage people from working. A tax rate between 0% and 100% that maximizes government tax revenue. The Laffer curve is typically represented as a graph that starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate.

Answer-2. Correct option is 'A'

In Canada, income from capital gains receives special treatment. If the federal government eliminated the special treatment for income from capital gains BC provincial government tax revenue would decrease. Because a tax cut proponents also contend that giving special treatement to income from capital gains would attract more venture capital investment and it increases the government revenue. But if the federal government eliminated the special treatment for income from capital gains, it discourage people from working and as a result, it decreases the government revenue.

Answer-3. Correct option is 'A'

If government increases the penalties for tax evasion everyone will increase the amount of income that they underreport. Increase penalities for failure to file correct information returns and as a results of this increase in penalities everyone will increase the amount of income that they underreported. Any person who fails to file required information returns in a timely manner or incorrectly reports such information is subject to penalities.


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