Governments provide tax preferences in several different formats. Suppose a preference of up to $200 is proposed to assist with purchase of Kindle readers, so that families may easily have cheap and easy access to electronic books sold by Amazon. The preference equals the amount paid for the Kindle, up to a maximum of $200. Which of the following statements about the revenue loss from this provision is accurate?

Question

Quizplus · Accepted Answer

This statement is incorrect. An adjustment to income, also known as an above-the-line deduction, reduces a taxpayer's gross income to arrive at their adjusted gross income (AGI). The tax saving effect of an adjustment depends on the taxpayer's marginal tax rate; taxpayers in higher tax brackets save more on their taxes for the same amount of adjustment than those in lower tax brackets.
The correct statement about the revenue loss from this provision would be:
C) A credit provides greater relief to high-income taxpayers.
This statement is also incorrect. A tax credit reduces a taxpayer's tax liability dollar-for-dollar, regardless of their tax bracket. Therefore, a tax credit of up to $200 for the purchase of a Kindle would provide the same tax relief to all taxpayers who qualify for the credit, regardless of their income level. However, in absolute terms, a tax credit may be more valuable to lower-income taxpayers because it represents a larger percentage of their overall tax liability.
The correct understanding of the proposed tax preference is that it functions like a tax credit, providing a dollar-for-dollar reduction in tax liability up to $200. This means that if a taxpayer purchases a Kindle and pays less than or equal to $200, they would receive a tax credit equal to the amount spent. If they spend more than $200, they would only receive a credit of $200. This tax credit would reduce the government's revenue by the amount of the credit claimed by all eligible taxpayers.
Therefore, the most accurate statement regarding the revenue loss from this provision is not listed among the options provided. The correct statement would be:
A tax credit for the purchase of Kindle readers up to $200 would reduce the government's revenue by the total amount of credits claimed by taxpayers, providing equal tax relief to all taxpayers who qualify for the credit, regardless of their income level.

Governments Provide Tax Preferences in Several Different Formats