You are advising the government on how to pay for national
defense. There are two proposals for a tax system to fund
national defense. Under both proposals, the tax base is an
individual’s income. Under proposal A, all citizens pay exactly
the same lump-sum tax, regardless of income. Under proposal
B, individuals with higher income pay a greater proportion
of their income in taxes.
a. Is the tax in proposal A progressive, proportional, or
regressive? What about the tax in proposal B?
b. Is the tax in proposal A based on the ability-to-pay principle
or on the benefits principle? What about the tax in
proposal B?
c. In terms of efficiency, which tax is better? Explain.
The country of Marxland has the following income tax and
social insurance system. Each citizen’s income is taxed at an
average tax rate of 100%. A social insurance system then provides
transfers to each citizen such that each citizen’s after-tax
income is exactly equal. That is, each citizen gets (through a
government transfer payment) an equal share of the income
tax revenue. What is the incentive for one individual citizen
to work and earn income? What will the total tax revenue in
Marxland be? What will be the after-tax income (including
the transfer payment) for each citizen? Do you think such a
tax system that creates perfect equality will work?
