Unit Three Test

27 04 2011

For this test you will be required to choose 2 of the 4 problems.  There will be statements to correct on the test as well.

Econoville is a fast-growing town, struggling with many problems.  Richard Wilkins, the mayor, has hired you for your economic expertise.  Choose two of the four situations and provide recommendations on what the mayor should do. For each situation, thoroughly describe the economic principles involved in creating the problem and then offer solutions.  Consider the pros and cons of your solution and make a clear recommendation.  For the purposes of the test, you can assume the mayor has significant power.  (i.e. don’t worry too much about the politics, focus on the economics).

  1.  The town has a small public park that is sometimes empty and sometimes too busy for everyone to use (eg Frisbee players are trampling through picnics, etc).  People are complaining that they can’t enjoy the park because it is too crowded.
  2. A new electricity generating station opened to meet increased demand from the town.  Residents near the plant are complaining about increased air pollution and asthma cases in the neighbouring communities are increasing.
  3. Rent prices are increasing in town and some residents are paying over 60% of their income in rent.  Some residents can no longer afford housing of any type.
  4. The town budget is limited and the mayor needs to find new sources of revenue. The town currently has no taxes in place.  The mayor would like your opinion on what type of tax or taxes would raise the most money without unduly burdening town residents.
Marking Scheme

Criteria

Insufficient Evidence

Limited Evidence

Some Evidence

Considerable Evidence

High Degree of Evidence

1) Does the answer demonstrate an understanding of the underlying economic concepts? (KU)

0

1

2

3

4

2) Does the answer use appropriate models, graphs and examples to support arguments? (AP)

0

1

2

3

4

3) Is the answer well-reasoned? Does it consider multiple perspectives and all available evidence? (TI)

0

1

2

3

4

4) Does the answer come to a clear, easy to understand conclusion, supported by reasoned arguments? (CM)

0

1

2

3

4





The Pros and Cons of Corporate Taxes

25 04 2011

First of all, what is a corporate tax? It is the tax on income or capital of certain types of legal entities, or simply put, taxes on corporations. The usual practice is to impose the taxes on net taxable income, which is the gross income after it has been accounted for deductions and credits. In politics, a few argue to cut corporate taxes, others desire to increase them. But ultimately, what does the corporate tax do?

Pros

A Source of Revenue:

Ultimately, a tax is either used to gain revenue for the government. Corporate taxes effectively do this because corporations are the largest money makes in the economy. This means a steady and strong flow of cash for the government revenue. During the recession (2009), a figure of 30.4 billion was made on corporate taxes of 10 corporations alone. This shows that, by targeting those making large profits, a government can make gains when companies do. It increases the revenue of the government which may be used towards national debt or public services.

For the Greater Good:

Another point is that the benefits seem to outweigh the negatives. The tax is effective in that it takes from large companies and distributes the benefit to everybody. The taxes may take some money away from businesses but ultimately it is not harmful. It still allows for businesses to function and grow and do not overly inhibit companies’ ability to make profit.

Equitable:

This tax is equitable in that everybody pays taxes. Corporations should not be an exception. Since corporations exist in the country, they benefit from the country’s policies and services. If corporations were not taxed, they would be getting a free ride on services. As a part of society, it is equitable for corporations to pay taxes.

Cons

Target of Taxes Misses the Mark:

The fact is, although corporate taxes are meant to tax wealthy companies, the costs actually end up being sent somewhere else. The groups that end up getting the burden of these taxes are none other than the consumer and the worker. Workers are affected in that the costs of the tax either reduce their salaries or hiring. While consumers are affected in that the company passes on the tax in their products and services by making them more expensive.

Attack on Corporations:

In addition to that, another con of the corporate tax system is that it takes away funds from companies/corporations. This is economically inefficient, because in an economically efficient situation, no one can be made better off without making someone else worse off. Corporate taxes end up making companies worse off than if they were not being taxed.

Scares away Business:

Lastly one must consider the economic growth in a country. Companies try to pick the best place that can facilitate their growth, where they could be the most profitable. By introducing a corporate tax in a certain country, companies may avoid it and search for other alternatives. Some may turn to tax shelters like the Cayman Islands; others just search for locales that have lesser taxes. Quite simply, a corporate tax can scare away potential and current investors to other countries, leading to a reduction of economic activity.





Capital Gains Tax

25 04 2011

Capital gains tax is a tax on capital gains. Capital gains is the revenue made from selling capital assets, which are assets that are not easily sold to create cash and are kept for long periods of time. Examples of capital assets include investments, real estate, and in the case of businesses, machinery, land and buildings.

Why is this tax a good option?

1. Equity

Without the capital gains tax, people earning an income of $100 000 by working would be taxed, while wealthier people who can afford to invest in capital assets pay no tax from making a capital gain of $100 000. This puts the burden of tax on less wealthy individuals who have a harder time bearing the tax, rather than on those who have a higher amount of disposable income and can afford to pay more tax. Having a capital gains tax helps redistribute wealth in an economy and prevents the gap between the rich and poor from growing.

2. Stabilizes Amount of Taxable Income

The capital gains tax not only generates more revenue for the government, but also prevents people from putting all their money into capital assets as a way to escape taxation. This in turn prevents the depletion of the amount of taxable income available to the government. By maintaining a steady source of tax, the government will be less likely to experience a lack of financial resources to fund its activities and fall into debt.

3. Extraneous Costs

If there was no capital gains tax, taxpayers will attempt to find a way around paying tax by turning their income into capital gains. This would lead to higher costs for running the judicial system, because the court system must deal with cases of people illegally turning income into capital gains to escape tax, and the government will have to spend time and energy creating legislation preventing taxpayers from escaping tax illegitimately.

Why is this tax a bad option?

1. Discourages Investment

Investing in capital assets increases one’s income and spending power when one sells the asset to make capital gains. A capital gains tax decreases revenue made from capital gains and thus discourages people from investing and taking risks as a way to gain revenue. This slows economic growth as a result due to decreased consumption (due to lower incomes) and investment in innovation.

2. Money Lost

The growth in the monetary value of capital assets is often the result of inflation, so the capital gains tax would essentially be placed on inflation, not on an actual increase in the value of the capital asset. As a result, people could actually be losing money when they sell their capital assets. At this rate, individuals may be encouraged to spend their money rather than try to place it into capital assets for fear that they will actually lose money when they sell the asset. This can cause problems such as insufficient investment into retirement funds.

3. Decreases Flexibility in Choosing Investments

With a capital gains tax, investors may be discouraged from switching their capital assets to ones that offer a higher rate of return for fear of losing money when selling their old capital assets. This prevents the investors from increasing their income and spending power.





Taxes – Part 2

21 04 2011

Once you have completed part one, read over the party platforms on taxes and economic policies.  This page on the Globe and Mail is a good starting point.  There are links to each party’s website where there are more details.

Which party platform do you prefer?  Comment and give reasons on this post.





Taxes – Part 1

21 04 2011

The government of Will World has decided it is necessary to increase taxes.  They are considering four different options:

  • A 15% tax on business profits
  • An 8% sales tax
  • A increase in income taxes by 5%
  • A tarriff on energy imports of $5 per unit (excise tax)

Before we look at the best tax for Will World, lets consider taxes in general.

  • Income Taxes – Unicorn
  • Sales Taxes – LGT
  • Corporate Taxes – Magnum
  • Property Taxes – SINJ
  • Capital Gains Taxes – CDsquaredK
  • Excise Taxes (includes ‘sin’ taxes, tariffs) – Mangoe

Each group has been assigned a tax. In your groups, research your assigned tax and develop the three most convincing arguments for why your tax is the best option and the three most convincing arguments for why your tax worst option.

Criteria for a ‘good’ tax:

  • Raises sufficient funds for the government (we aren’t looking for a specific dollar value but the tax has to be effective at actually raising revenue for the government)
  • Equitable (this is difficult to define when discussing taxes – consider who bares most of the burden of paying the tax – it is equal? fair?)
  • Minimizes inefficiencies while maximizing social benefit – any tax will reduce the efficiency of the economy, you want to minimize this while providing the maximum social benefit possible. (social benefits can include encouraging positive behaviour, reducing negative externalities, reducing inequality, increasing standard of living, etc.)
Create a blog post that summarizes your tax.  Briefly describe it and your three arguments for and against your tax.
For homework, read over all the posts and comment on which tax you think is ‘best’ on this post.




Tragedy of the Commons

18 04 2011

Common Resources are non-excludable and rival.

If the supply of bluefin tuna is decreasing, why isn’t the price of sushi increasing?





Fire Services – A Public Good?

15 04 2011

Watch the video and read the article on the Tennessee house fire.

In the comments to this post answer the following questions:

  1. Do fire services meet the criteria for a public good?
  2. Is there a free rider problem in this situation?
  3. Is there a problem with incentives in this situation?
  4. How should fire services be provided and funded?
  5. Should the fire fighters have put out the fire?

Due by the start of class on Monday.