The assumptions implied by the 'flypaper theory':
A)are mostly valid in developed industrialised countries
B)are necessary for one to discuss the ability-to-pay principle
C)are rarely valid
D)provide a fundamental building block for the modern theory of tax incidence

Question

Quizplus · Accepted Answer

The 'flypaper theory' assumes that taxes stick where they are first applied and do not shift to other individuals or groups. This assumption is rarely valid as taxes can shift depending on factors such as elasticity of demand and supply. However, the theory does not provide a fundamental building block for the modern theory of tax incidence as it is not an accurate reflection of how taxes actually affect economic agents.

The Assumptions Implied by the 'Flypaper Theory