LUMP SUM TAXES

LUMP SUM TAXES Suppose the government imposes a tax of $4,000 on everyone. That is, everyone owes the same amount, regardless of earnings or any actions that a person might take. Such a ‘tax is called a lump-sum tax. A lump-sum tax shows clearly the difference...

CASE STUDY

CASE STUDY ICELAND’S NATURAL EXPERIMENT In the 19808, Iceland changed its tax system in a way that, as a side effect. provided a natural experiment to show how taxes affect an economy. Before the reform, people paid taxes based on their previous...

ADMINISTRATIVE BURDEN

ADMINISTRATIVE BURDEN If you ask the typical person on April 15 for an opinion about the tax system, you might hear about the headache of filling out tax forms. The administrative burden of any tax system is part of the inefficiency it creates. This burden includes...

CASE STUDY

CASE STUDY SHOULD INCOME OR CONSUMPTION BE TAXED? When taxes induce people to change their behavior-such as inducing Jane to buy less pizza-the taxes cause deadweight losses and make the allocation of resources less efficient. As we have already seen, much government...

DEADWEIGHT LOSSES

DEADWEIGHT LOSSES One of the Ten Principles of Economics is that people respond to incentives, and this includes incentives provided by the tax system. If the government taxes ice cream, people eat cream and more frozen yogurt. If the government taxes housing, people...