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Tax: flat, lump sum, ad valorem, luxury auto excise tax

A. Some have argued that a lump sum tax is the most equitable and efficient system of taxation. If lump sum taxes are so efficient and equitable, why aren't they widely used?

B. In 2002, the US federal government levied a tax of 3 percent on that part of a car's price exceeding $40,000. (For example, the tax liability on a $50,000 car would be 0.03 ($50,000 - $40,000), or $300.) Please tell me what is the efficiency, equity, and administrability of this "luxury car tax."

C. What an ad valorem tax is and cite an example of such a tax. So is this form of taxation an effective way for state and local governments to increase revenue?

Solution Preview

A. A lump sum tax is an equal or fixed amount of tax for each taxpayer. It would be a very equitable method of assessing tax burden if every person earned the same amount of money. In that case, the tax would be very fair. However, when each is assessed the same amount, one must consider the percentage of tax being paid. As a society, we have determined that it would be unfair for low income people to have to pay high amounts of tax. It would be called a regressive tax because the lower income taxpayers would pay a much higher percentage of tax as opposed to the higher income people. As it is, we have a progressive tax in which the rate or percentage of tax increases as income increases.

There is always talk about how the wealthy pay so little tax, but the truth is that the bulk of the income tax is paid by the higher income people regardless of the structures of the rates, the deductions, or the hype. "The top 1 ...

Solution Summary

In 643 words, the solution clearly explains the different types of taxes with examples.

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