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Chapter 7: Problem 1

The United States imposes an excise tax on the sale of domestic airline tickets. Let's assume that in 2013 the total excise tax was \(\$ 6.10\) per airline ticket (consisting of the \(\$ 3.60\) flight segment tax plus the $\$ 2.50$ September 11 fee). According to data from the Bureau of Transportation Statistics, in 2013, 643 million passengers traveled on domestic airline trips at an average price of \(\$ 380\) per trip. The accompanying table shows the supply and demand schedules for airline trips. The quantity demanded at the average price of \(\$ 380\) is actual data; the rest is hypothetical. a. What is the government tax revenue in 2013 from the excise tax? b. On January 1, 2014, the total excise tax increased to \(\$ 6.20\) per ticket. What is the quantity of tickets transacted now? What is the average ticket price now? What is the 2014 government tax revenue? c. Does this increase in the excise tax increase or decrease government tax revenue?

Short Answer

Expert verified
Answer: To determine if the increase in excise tax increased or decreased the government tax revenue, compare the revenue from 2013 and 2014. If the government tax revenue in 2014 (R) is greater than $3,922,300,000, the revenue increased. If it is less than $3,922,300,000, the revenue decreased. If R is equal to $3,922,300,000, then the revenue remained the same.

Step by step solution

01

Part a: Calculate the government tax revenue in 2013

In 2013, the total excise tax per ticket was $6.10. The total number of passengers who traveled on domestic airline trips was 643 million (643,000,000). To find the government tax revenue in 2013, multiply the number of passengers by the excise tax per ticket: Government tax revenue in 2013 = Number of passengers × Excise tax per ticket Government tax revenue in 2013 = 643,000,000 × 6.10 Government tax revenue in 2013 = $3,922,300,000
02

Part b: Calculate the quantity of tickets transacted, the average ticket price, and government tax revenue in 2014

In 2014, the total excise tax increased to $6.20 per ticket. To find the quantity of tickets transacted now, we need to first calculate the change in tax per ticket, and then use that to estimate the new average ticket price. Using the new average ticket price, we can determine the approximate number of tickets transacted by referring to the supply and demand schedules (which are not provided here but should be available in accompanying course material). Change in tax per ticket = New excise tax - Old excise tax Change in tax per ticket = 6.20 - 6.10 Change in tax per ticket = $0.10 To estimate the new average ticket price, add the change in tax per ticket to the 2013 average ticket price: New average ticket price = Old average ticket price + Change in tax per ticket New average ticket price = 380 + 0.10 New average ticket price = $380.10 Based on this new average ticket price, determine the quantity of tickets transacted in 2014 from the supply and demand schedules. Let's call this quantity Q. To find the government tax revenue in 2014, multiply the number of tickets transacted (Q) by the new excise tax per ticket: Government tax revenue in 2014 = Q × 6.20 Let's call this revenue R.
03

Part c: Determine if the increase in excise tax increased or decreased government tax revenue

To see if the increase in excise tax led to an increase or decrease in government tax revenue, compare the revenue from 2013 and 2014 (R and $3,922,300,000): If R > $3,922,300,000, then government tax revenue increased. If R < $3,922,300,000, then government tax revenue decreased. If R = $3,922,300,000, then government tax revenue remained the same. Based on this comparison, the increase in excise tax either increased or decreased the government tax revenue.

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Most popular questions from this chapter

The state needs to raise money, and the governor has a choice of imposing an excise tax of the same amount on one of two previously untaxed goods: the state can tax sales of either restaurant meals or gasoline. Both the demand for and the supply of restaurant meals are more elastic than the demand for and the supply of gasoline. If the governor wants to minimize the deadweight loss caused by the tax, which good should be taxed? For each good, draw a diagram that illustrates the deadweight loss from taxation.

Assess the following four tax policies in terms of the benefits principle versus the ability-to-pay principle. a. A tax on gasoline that finances maintenance of state roads b. An \(8 \%\) tax on imported goods valued in excess of \(\$ 800\) per household brought in on passenger flights c. Airline-flight landing fees that pay for air traffic control d. A reduction in the amount of income tax paid based on the number of dependent children in the household.

You work for the Council of Economic Advisers, providing economic advice to the White House. The president wants to overhaul the income tax system and asks your advice. Suppose that the current income tax system consists of a proportional tax of \(10 \%\) on all income and that there is one person in the country who earns \(\$ 110\) million; everyone else earns less than \(\$ 100\) million. The president proposes a tax cut targeted at the very rich so that the new tax system would consist of a proportional tax of \(10 \%\) on all income up to \(\$ 100\) million and a marginal tax rate of \(0 \%\) (no tax) on income above \(\$ 100\) million. You are asked to evaluate this tax proposal. a. For incomes of \(\$ 100\) million or less, is this proposed tax system progressive, regressive, or proportional? For incomes of more than \(\$ 100\) million? Explain. b. Would this tax system create more or less tax revenue, other things equal? Is this tax system more or less efficient than the current tax system? Explain.

Each of the following tax proposals has income as the tax base. In each case, calculate the marginal tax rate for each level of income. Then calculate the percentage of income paid in taxes for an individual with a pre-tax income of \(\$ 5,000\) and for an individual with a pre-tax income of \(\$ 40,000 .\) Classify the tax as being proportional, progressive, or regressive. (Hint: You can calculate the marginal tax rate as the percentage of an additional \(\$ 1\) in income that is taxed away.)a. All income is taxed at \(20 \%\). b. All income up to \(\$ 10,000\) is tax-free. All income above \(\$ 10,000\) is taxed at a constant rate of \(20 \%\). c. All income between \(\$ 0\) and \(\$ 10,000\) is taxed at \(10 \%\). All income between \(\$ 10,000\) and \(\$ 20,000\) is taxed at \(20 \%\). All income higher than \(\$ 20,000\) is taxed at \(30 \%\). d. Each individual who earns more than \(\$ 10,000\) pays a lump-sum tax of $\$ 10,000\(. If the individual's income is less than \)\$ 10,000$, that individual pays in taxes exactly what his or her income is. e. Of the four tax policies, which is likely to cause the worst incentive problems? Explain.

In Transylvania the basic income tax system is fairly simple. The first 40,000 sylvers (the official currency of Transylvania) earned each year are free of income tax. Any additional income is taxed at a rate of \(25 \% .\) In addition, every individual pays a social security tax, which is calculated as follows: all income up to 80,000 sylvers is taxed at an additional \(20 \%\), but there is no additional social security tax on income above 80,000 sylvers. a. Calculate the marginal tax rates (including income tax and social security tax) for Transylvanians with the following levels of income: 20,000 sylvers, 40,000 sylvers, and 80,000 sylvers. (Hint: You can calculate the marginal tax rate as the percentage of an additional 1 sylver in income that is taxed away.) b. Is the income tax in Transylvania progressive, regressive, or proportional? Is the social security tax progressive, regressive, or proportional? c. Which income group's incentives are most adversely affected by the combined income and social security tax systems?
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