Deck 16: Taxes, Borrowing, and the National Debt

Question 1

Why does the government place excise taxes on goods such as cigarettes and alcohol? Is it because these products are "sinful"? (These taxes are often called "sin taxes.") Do you believe that excise taxes reduce consumption of these goods by very much? What does your response to the previous question imply regarding the amount of government excise tax revenue?
previous question:
Should the Social Security tax be overhauled to reduce its regressivity? Why or why not? How might this be done?

Answer 1

In order to restrict the supply of some goods and services government often use excise tax as a tool. The imposition of such tax decreases the supply of that goods and services in the market and thus increasing the price and decreasing the quantity in the market.
Government often discourages the use of cigarettes as it contains tobacco and causes cancer and other harmful diseases, just as drugs which have harmful social and economic effects. Cigarettes are legal in the market and if so drugs, the government will likely to prevent the consumption of such things by means other than legislation. One of such measure is imposing excise tax. In this way excise tax on cigarettes are similar to excise tax on drugs.
A "sin tax" is a tax levied on goods and services that are seen as harmful to the society. These taxes usually discourage people to consume certain goods and services by increasing their prices and decreasing the supply, without making them illegal. Thus, the excise tax, which works in the same manner by decreasing the quantity consumed of cigarettes and alcohol in the market, also sometimes considered as "sin tax".
A "sin tax' is an indirect tax which affects those who use the certain goods and services and also generates huge tax revenues for the government. Therefore, these taxes are also used as a means to raising revenues to the government and also act as social corrective measure. Thus, it is clear that we do not tax alcohol and cigarettes solely because they are "sins".
Many economists argue that the "sin taxes" are not effective in reducing cigarette consumption, it only increase the burden of taxes. The study shows that only 2% of the smokers quit smoking because the prices have gone up. The heavy smokers have inelastic demand curve for cigarette and thus the demand does not change much because of the higher prices. Therefore, "sin taxes" does not decrease the consumption of the alcohol or cigarette.
As the sin taxes never that much effective in reducing consumption, it increases the government revenue from excise taxes. The constant consumption from before tax and rise in price raises the excise revenue from sin taxes.

Question 2

What sort of tax system do you feel is the fairest? What are the advantages and disadvantages of regressive, progressive, and proportional taxes?

Answer 2

Government imposes taxes to finance its programs. Government taxes come in various forms and are imposed by the federal government as well as by state and local government. Imposition of taxes has different effects on macro economy as well as on the income distribution. According to redistributive effect of taxes there are three basic types of taxes: progressive taxes, proportional taxes and regressive taxes. If we take the redistributive nature of the taxes, the fairest tax system of all is the progressive tax system. This system redistributes the income in favor of the poor.
A progressive tax takes larger percentage of income from high income people. While the flat rate of tax is the proportional tax that takes the same percentage of income from people of all income level. Lastly, tax is highly regressive if it takes greater percentage of income from low income individual than the high income individual. The advantage of the taxes is that it redistributes the income. The progressive tax redistributes the income in favor of the poor, while the other two redistribute the income in favor of the richer section of the society. A flat tax rate is eventually simple to calculate and administrate. But, it taxes the high and low income people alike and hence, it implies a more inequality on income distribution. Therefore, from the perspective of the income distribution progressive tax is the fairest.

Question 3

What do you think of the European approach to encouraging conservation in gasoline use by imposing very large excise taxes on gasoline? Do you think this would work in the United States? Do you think it makes a difference if we are considering a short time period (such as two months) versus a longer time period (such as two years)? Why?

Answer 3

not answer

Question 4

Visit the Census Bureau Web site (http://www.census. gov) to find current information on federal government spending and tax revenue. What is the major spending category? What is the major tax revenue source?

Question 5

Visit the Treasury Bulletin Web site (http://www.fms. treas.gov/bulletin) to determine the current size of the budget deficit and of the national debt. How have these figures changed, if at all, from the data in this textbook?

Question 6

Do you believe that the current budget deficit should be reduced? If so, how should it be done? Should taxes be increased? Should government spending be reduced? If so, which specific programs should be reduced?

Question 7

Are you concerned about the national debt? Why or why not? Has your opinion changed as a result of what you have learned in this chapter? Has your opinion changed as a result of the large buildup of military expenditures related to the wars in Iraq and Afghanistan? Has your opinion changed as a result of the 2008-2009 recession and stimulus spending by government?

Question 8

Consider the recent cuts in the federal personal income tax. What is the effect on income distribution? Do you believe this is fair? Why or why not?

Question 9

Consider other proposals to replace the federal income tax structure with a flat rate tax structure or to replace the income tax with a national sales tax. How would these actions affect income distribution? Do you agree with these proposals? Why or why not?

Question 10

How do you feel about the elimination of the estate tax on extremely high values of inheritance? Why did the Bush administration refer to this tax as a "death tax"?

Question 11

How do you feel about a reduction in the capital gains tax? An increase in the Earned Income Tax Credit? What is the effect of these on income distribution?

Question 12

Should the Social Security tax be overhauled to reduce its regressivity? Why or why not? How might this be done?