Question

18. The U.S. Senate is considering a bill that would tax the sale of laptop computers in order to fund a computer educa- tion program for presidential hopefuls. The Congressional Budget Office (CBO) estimates that if it implements a low tax of $12 per laptop, revenue should be sufficient to exactly fund the program. The CBO also estimates that a high tax of $230 per laptop will exactly fund the program. a. How can a low tax and a high tax raise exactly enough money to fund the program? Illustrate your answer using a graph. Suppose that you are an economic advisor to the Senate Finance Committee, tasked with analyzing the economic impact of the tax proposals. Which proposal do you recommend, and why? b.

Answer 1

Given that The U.S senate is considering a bill that would fax the sale of laptop computers in order to find a computer education program for presidential hopefuls. The tax revenue is = Q_laptop times TAX As the tax rate increases, lesser number of laptops are being sold in the market. According the question the two schemes generate the same taxation revenues, this means. Q_TAX times $12 times $12 = Q_TAX times $230 times $230 when the fax rate is low, there is a sufficiently large number of laptops sold. When the tax rate is sufficiently high, even a lower number of laptops sold generates enough revenue. It's provided that both proposals raise the identical taxation revenues, the relevant determining factor is the size of dead weight loss (DWL). Given the DWL arises from lost transactions due to the quantity effect, if must be the case that the low tax rate proposal is to be preferred in order to minimize