1. lump-sum taxes

2. forward shifting

3. compensated demand curve

4. Ramsey ( inverse-elasticity ) tax rule

5. negative income tax

6. non-refundable tax credit

7. realized capital gain

8. dividend paradox

9. capitalization of tax preferences

10. zero-rated ( tax-free ) commodities

Answer any 4 of the following 8 questions.

1. Does making a tax system more equitable ( vertically ) mean that the tax system must become less efficient? How does this trade-off ( or lack of trade-off ) depend on the available tax instruments?

2. What would be the incidence of a 20 percent excise tax on a good, if the demand curve for the good had the equation

a when the good is supplied by a perfectly competitive industry?

b when the good is supplied by a monopoly?

3. Explain ( as precisely as possible ) the deadweight loss imposed by a tax on interest income.

4. Suppose a person faces the following tax schedule : all income up to $200 per week is tax-free ; income between $200 and $400 per week is taxed at the rate of 20% ; all income in excess of $400 per week is taxed at the rate of 50 %. Suppose also that the person earns $10 per hour at her job, and is free to vary her hours of work.

a Illustrate the opportunity set.

b If she chose to work 40 hours per week, what can be said about her marginal rate of substitution between consumption and leisure?

c If she chose to work 45 hours per week, what can be said about the effect of lowering the marginal tax rate to 30 % on all income earned above $450 per week ( leaving unchanged the tax payable on income up to $450 per week )?

5. Suppose the labour supply of every person in a country had a constant elasticity of e > 0 with respect to the person's net-of-tax wage. Suppose as well that the income elasticity of labour supply were zero.

If the government were to choose a single marginal tax rate t on labour income, with tax proceeds paid equally to all people in the country, what tax rate would it choose if it were ``Rawlsian''? ( i.e. what rate would it choose if it wished to maximize the well-being of the worst-off person in the country? )

6. Discuss the choice between a tax deduction and a tax credit for charitable donations, from the standpoints of equity and efficiency.

7. What is the ``lock-in effect''? Would it be reduced by taxing 100 % of capital gains, rather than 75 %?

8. a Suppose that some machine functioned ``just like new'' for 5 years, and then fell apart completely. Describe as precisely as possible the time path of true economic depreciation of the asset.

b Suppose now that the firm were allowed to deduct 20 percent of the cost of the machine from its taxable income for each of the first five years following the machine's purchase. If the machine were financed by borrowing, would the rate of return which justified the firm buying it be higher or lower than it would be if there were no corporate income tax? Explain briefly.