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Poll taxes and long-term growth

Discussion Question 1

British Prime Minister Lady Thatcher proposed a poll tax that levied an equal amount of tax on each citizen regardless of his or her income. This tax was repealed after a brief trial period. Why do you think this tax was unpopular? Discuss the pros and cons of the tax and arrive at a conclusive answer.

Discussion Question 2

One strategy of long-term growth is to provide personal tax incentives for households to increase their personal savings. Explain the rationale for this policy. Also analyze the effect this policy might have in the short run on the following macroeconomic variables:

Economic growth
Interest rate
Investment demand
Government deficit

Solution Preview

This tax would be considered regressive, meaning that it falls more heavily on the poor. A tax that is a fixed amount, rather than a percentage, will always be regressive. This is because the poor will end up paying a greater percentage of their income than will the rich. Such a situation is generally considered unfair. It is generally felt that the rich, who can afford to pay more in taxes without really suffering, should pay more, as a percentage, than the poor.

A poll tax is similar to a flat rate tax, which is a fixed percentage of one's income, although it is more regressive. The flat tax has been successfully implemented in certain places, such as Ireland's flat corporate tax. The pros of such a tax are that it would be easy to administer, and is simple to understand. It's argued that our current system, ...

Solution Summary

Taxation and savings incentives in relation to economic growth, interest rates, investment demand and government deficits.