Exercises: Taxes and their effects

Distinguish between direct and indirect taxes. Classify each of the following: income tax, VAT, excise duty on cigarettes, corporation tax, Universal Social Charge (USC).

A good is sold for €80 before VAT. VAT is charged at 23%.

1. a) Calculate the VAT payable.

1. b) Calculate the price the consumer pays.

Explain the difference between a progressive, a regressive and a proportional tax. Give one example of each type of tax or one example of how a tax could have that effect.

In Ireland, a worker earns €60,000. Suppose income tax is 20% on the first €40,000 and 40% on the rest. The worker has a tax credit of €3,500.

1. a) Calculate gross tax before credits.

1. b) Calculate the tax payable after credits.

1. c) Calculate the average tax rate and the marginal tax rate.

The market for cigarettes has demand $Q_d = 1{,}000 - 50P$ and supply $Q_s = 100 + 100P$ (thousands of packs, $P$ in euro per pack).

1. a) Find the equilibrium price and quantity.

1. b) A €3 per pack excise duty is placed on suppliers, so the new supply is $Q_s = 100 + 100(P - 3)$. Find the new equilibrium price paid by consumers and quantity.

1. c) Calculate the price received by suppliers after tax and the share of the tax paid by consumers and by producers.

1. d) Calculate the Government's tax revenue.

Explain how each of the following taxes can be used to correct a market failure. Identify the market failure in each case.

1. a) The plastic bag levy.

1. b) A carbon tax on fuels.

1. c) Tax on sugar-sweetened drinks.

The demand for a good is $Q_d = 2{,}000 - 100P$ and supply is $Q_s = 200 + 200P$ (P in euro).

1. a) Find the equilibrium.

1. b) A per-unit tax of €3 is imposed on producers. Find the new equilibrium quantity, the price paid by consumers and the price received by producers.

1. c) Calculate the tax revenue and the deadweight loss.

1. d) Explain how the incidence would differ if demand were more inelastic, and why governments often tax goods such as tobacco and alcohol.

The Irish Government is considering cutting the top rate of income tax from 40% to 35%.

1. a) Explain, using labour market analysis, how the cut might affect labour supply and employment.

1. b) Discuss the effect on the distribution of income and on Exchequer revenue, with reference to the idea that a lower rate may sometimes raise revenue.

1. c) Evaluate whether the policy is likely to be effective, justifying your view.

Compare a carbon tax with direct regulation (a legal limit on emissions) as policy instruments to reduce pollution from Irish power stations. Consider efficiency, certainty of outcome, government revenue, the effects on low-income households and the possibility of carbon leakage. Reach a justified conclusion.