YORK UNIVERSITY YORK UNIVERSITY        Faculty of Arts

Final Examination        December 10, 2001

Economics 4070.03AF : Public Finance I        S. Bucovetsky

time=2 hours

The exam contains two sections, A and B. Section A is worth 40 % of the marks, section B 60 %. Note that there is some choice in each section.

A : 40 %( 5 % per question )

Explain briefly the significance for the economics of taxation of any 8 of the following 10 terms.

1. ad valorem tax

2. capitalization of taxes

3. excess burden

4. inverse elasticity rule

5. time inconsistency

6. income in kind

7. lock-in effect

8. imputed income from owner-occupied housing

9. target saving

10. straight line depreciation

B : 60 % ( 15 % per question )

Answer any 4 of the following 8 questions.

1. Under what conditions would a tax on wage and salary expenditures in a particular industry lower the return to capital in the country in which the tax is levied?

2. What would be the excess burden of a 20% tax on food purchases, if a person's compensated demand function for food were

F = 36(PC/PF)2
where F is her consumption of food, PC the price she pays per unit of clothing, and PF the price she pays per unit of food, if the price of clothing were 20, and the price of food ( not including tax ) were 10?

3. Would an increase in the marginal income tax rate lead to an increase in the amount of tax evasion? Discuss briefly.

4. How should an individual's borrowing expenses be treated under the Haig-Simons ( or ``comprehensive'' ) definition of taxable income?

5. Outline the main respects in which capital gains are treated differently in the Canadian personal income tax than they would be treated using the Haig-Simons ( or ``comprehensive'' ) definition of taxable income.

6. How does a person's marginal tax rate vary with her income if she faces the following tax schedule?

- her first $30,000 is taxable at a rate of 25 percent

- income in excess of $30,000, but less than $60,000 is taxable at a rate of 35 percent

- all income in excess of $60,000 is taxed at a rate of 40 percent

- she gets a basic non-refundable tax credit of $1000 ; she gets this credit regardless of her income

- she also gets a non-refundable children's tax credit of $5000

- if her taxable income exceeds $40,000, this children's tax credit is reduced by 20 cents for every dollar she earns in excess of $40,000

- the children's tax credit cannot be negative

7. In a two-period life-cycle model, suppose that a person chooses to consume exactly half the present value of her lifetime earnings in the first period. That is, suppose that

CP = 1
2
 [YP + YF
1 + r
 ]
where CP is her consumption in the first period, YP and YF are her earnings in the first and second periods, and r is the net-of-tax return she can earn on her saving.

a Is consumption in the first period a normal good for this person?

b How would the taxation of the return to saving affect how much she chose to save?

8. How are tax payments paid by foreign subsidiaries of Canadian companies treated under Canada's corporate income tax? Is this treatment optimal?

the end

File translated from TEX by TTH, version 2.00.
On 19 Dec 2001, 16:03.