Question

With examples explain the terms;

1. Equivalence between taxes
2. Direct versus indirect taxes
3. Dead weight loss

Answer 1

EQUIVALENCE BETWEEN TAXES

It is a type of return which is required on investment which is taxable just to make it equal with return on tax exempt investment .

EXAMPLE

FORMULA

R(te) = R(tf)/(1-t)

0.154 = 0.11 / ( 1-0.29)

R(te) = taxable equivalent yield for investor

R(tf) = return on tax-free investment = 0.11

t = investor marginal tax rates = 0.29

DIRECT VERSUS INDIRECT TAXES

DIRECT TAX is a tax which is paid directly by the firm or by the individual . EXAMPLE = income tax , corporate tax etc .

INDIRECT TAX is a type of tax which is not paid directly . It is transfered from one to another . EXAMPLE = exice duty , VAT etc

DEAD WEIGHT LOSS

It is a loss of efficiency of economics when the outcome ( equilibrium) is not achieved . It is also known as excess burden .

EXAMPLE

* Price floor will be the minimum wage