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Taxation equitiy, efficiency, and revenue generation

7. Analysis of taxation is complex. The issues you should address when looking at taxes are: the revenue raised, the equity of the tax, and the efficiency of the tax.

a. What is the importance of these three areas?

b. Give an example of a tax that does not meet these requirements and one that does.

8. What is a transfer program? Give an example of a transfer program.

9. What is a market failure? Why does a market failure occur? Give an example of a market failure in your answer.

10. What is a planned economy? Give examples of the benefits and downfalls to a planned economy.

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Taxation in democratic societies must be approved by the majority of the people. If the tax is inequitable, many people will believe it to be unfair. In the long run, an unfair tax may result in such a large disparity between rich and poor that social upheaval ensues. The efficiency and the amount of revenue raised are important on practical grounds. Taxes are expensive to administer, and the amount they garner must be enough to fund government expenditures. Otherwise the government will accrue debt very quickly, which has negative implications for the economy as a whole. An inefficient tax encourages tax payers to engage in activities that are harmful to society.

The most common test for the equity of taxation is whether it is regressive or progressive. Regressive taxes charge more to the poorer members of society, as a percentage of their income. Flat taxes, which charge the same percent to everyone, are the most regressive. For example ...