Question

Although the foundation of any tax system is the raising of revenue, additional tax policy objectives are: * Economic considerations such as control of the economy, encouragement of certain activities and industries, and encouragement of small business * Social considerations such as non-taxability of certain employee benefits, educational credits and deductions, disallowance of expenditures contrary to public policy, and discouragement of certain behaviors *Equity considerations such as alleviating the effects of multiple taxation and recognizing the wherewithal to pay concept.

Answer 1

1) As per Mr. Prescott, Americans aged 15-64, on a per-person basis, work 50% more than the French, Germans and Italians. It turns out that the answer is not related to cultural differences or institutional factors like unemployment benefits, but that marginal tax rates explain virtually all of this difference. As per the analysis conducted it was noticed that the institutional constraints are not playing a bigger role. According to the OECD, from 1970-74 France's labor supply exceeded that of the U.S. Also, a review of other industrialized countries shows that their labour supplies either exceeded or were comparable to the U.S. during this period. However, later France's labor supply dropped significantly (as did others), and that some countries improved and stayed in line with the U.S. Controlling for other factors, what stands out in these cross-country comparisons is that when European countries and U.S. tax rates are comparable, labor supplies are comparable. However some analysis have suggested that cultural differences explain the difference between European and American labour supplies. The French, for example, prefer leisure more than do Americans or, on the other side of the coin, that Americans like to work more. However Preston states that the major difference was because of tax rates. Germans and Americans spend the same amount of time working, but the proportion of taxable market time vs. non-taxable home work time is different. In other words, Germans work just as much, but more of their work is not captured in the taxable market. Many Italians, for example, aren't necessarily working any less than Americans -- they are simply not being taxed for some of their labour. Change the tax laws and you will notice a change in behaviour: The real issue is about whether it is better to tweak the economy with short-lived stimulus plans or to establish an efficient tax system with low tax rates that do not change with the political climate. What does this mean for U.S. tax policy? It means that we should stop focusing our attention on the recent tax cuts and, instead, start thinking about tax rates.

2) Indifference curve analysis can be used to explain an individual’s choice between income and leisure and to show why higher overtime wage rate must be paid if more hours of work is to be obtained from the workers. It is important to note that income is earned by devoting some of the leisure time to do some work. That is income is earned by sacrificing some leisure. The greater the amount of this sacrifice of leisure, that is, the greater the amount of work done, the greater income an individual earns. However, the actual choice of income and leisure by an individual would also depend upon what is the market rate of exchange between the two, that is, the wage rate per hour of work. It is worth noting that wage rate is the opportunity cost of leisure.

For Example to increase leisure by one hour, an individual has to forego the opportunity of earning income which he can earn by doing work for an hour. This leads us to income-leisure constraint which together with the indifference map between income and leisure would determine the actual choice by the individual.