Question

1a. If the City of Decatur wanted to increase tax revenue but didn’t want to hurt low-income citizens, what options do they have? Give me three examples of how this could be possible. Make sure to tell me if your method is a specific tax, what type of tax it is, and the proportion tax type it is. Explain each tax change

1b. How do the “Animal Spirits” of an economy dictate how effect tax changes and stabilization policy changes will be? Provide a thorough explanation.

Answer 1

1

a) Government can introduce wealth tax say wealth tax above $1million. This is a lum sum tax..

Government can impose tax on luxuries. This would be a specific tax.

Goverment can impose tax on long term capital gain . This will be specific tax.

b) Animal spirits means pessimism or optimism investor has about an investment project. As we know investment demand is unstable and it is instability of investment demand which causes fluctuations in bussiness cycle. Suppose an individual is pessimist that tax say corporate profit tax would be higher in next financial year. This mean an individual will have lesser profit after paying out taxes . Thus this pessimism about the tax rate will force individual to invest less. Less investment will cause fluctuations in bussiness cycle

**Write fir any doubt. Kindly upvote if possible.