1. Countries with higher personal saving rates tend also to have higher rates of business investment and capital accumulation. Explain why this fact does not provide a justification based on social efficiency for policies that increase U.S. personal saving.
2. A consumer has decided to set aside $2000 out of her income in the current year and save it for retirement. She has the choice of putting all $2000 in a traditional IRA or else putting all $2000 in a Roth IRA. What factors should determine her choice? Be as specific as possible. To simplify the problem, you may assume that she knows her marginal income tax rate and knows the marginal income tax rate she will have to pay in the first year of her retirement when she will withdraw the $2000 IRA deposit and the full return on it.
3. From 1983 to 1987, a period of rapid economic growth in the U.S., total savings by contributors to IRAs increased by approximately the amount of their IRA contributions. Does this show that virtually all of their IRA savings were “new” savings—money that would not have been saved in the absence of the IRA program? Justify your answer.
4. a. Explain carefully how the rate of inflation and the length of the holding period (how long a durable asset is owned) affect the burden of the capital gains tax for the owner of an asset.
b. Explain what the lock-in effect is for capital gains that are taxed on realization. Explaikn how this effect can lead to inefficient allocation of capital.
5. a. Explain how a decrease in a tax rate might decrease revenue from the tax in the short run but increase the tax revenue in the long run. Give an example of a tax that might have this property. Explain.
b. Explain how a decrease in a tax rate might increase revenue from the tax in the short run but decrease the tax revenue in the long run. Give an example of a tax that seems to have this property. Explain.
6. What are the main arguments based on social efficiency that support having an estate tax similar to the U.S. tax before 2002? What are the main arguments against having such a tax?
7. What is the effect of the corporate income tax on the investment level of a perfectly competitive corporation that finances its investment by debt (with deductible interest) and has no adjustment cost of investment? Assume that the firm is allowed to deduct economic depreciation on its capital (the change in market value of its capital during the year) in computing its taxable income. Explain and justify your answer. How might the long run effect of the corporate income tax differ in real life from the effect it has in the model of a competitive corporation? Explain.