Question

When government is trying to raise tax revenue, it sometimes attempts to target higher-income people because they are in a better position to bear the burden of a tax. However, it can be very difficult to earn tax revenue from wealthy people. Consider the progressive nature of the U.S. federal income tax system: It's designed so that higher incomes are taxed at higher tax rates. Thinking about the elasticity of labor supply, why might it be more difficult to collect tax revenue from a wealthy individual than from a poor person, all else equal

Answer 1

It can be harder to collect tax revenue from wealthy individuals due to the elasticity of their labor supply and their ability to utilize tax planning strategies to minimize tax liability. Regressive tax systems like excise taxes are less burdensome to the wealthy, while the progressive U.S. federal income tax system is designed to tax higher incomes more, though it also enables various tax mitigation strategies.

Step-by-step explanation:

Collecting tax revenue from wealthy individuals can be more difficult due to the elasticity of labor supply. Wealthy individuals often have more control over their income sources and can alter their economic activities to minimize tax exposure. For instance, they might invest in tax-efficient vehicles, defer income, or use deductions strategically to reduce taxable income. This flexibility differs from lower-income individuals who typically rely on wages that are less flexible and therefore have a less elastic labor supply. The progressive nature of the U.S. federal income tax system imposes higher rates on additional income, causing high-income earners to potentially seek ways to avoid higher tax brackets through legal tax planning strategies and exploiting complex tax code provisions.

The use of regressive tax systems, such as excise taxes which do not rise proportional to income, can sometimes pose less of a burden on higher-income individuals compared to progressive taxes. Excise taxes, sometimes referred to as "sin taxes," are levied on goods like alcohol, tobacco, and gasoline, and tend to take up a larger percentage of lower-income earners' budgets compared to those who are wealthier.

The U.S. federal tax system aims to be a graduated progressive tax system where income tax rates rise with higher income levels. However, this design faces challenges due to the various ways higher-income individuals can manage their finances to mitigate the tax burden. This includes benefiting from specific provisions and adjustments made to the tax code, such as the elimination of 'bracket creep' since the 1980s, where tax bracket thresholds are adjusted for inflation to prevent taxpayers from being pushed into higher tax brackets due to nominal income increases that don't represent actual increases in purchasing power.

Answer 2

Answer: The labor supply curve for a wealthy individual is usually more elastic than a poor person's labor supply curve

Step-by-step explanation:

Tax could be described as individuals paying a particular percentage of their income and whatever they use then pay to the government. The aim of the tax being collected is to generate funds internally which could be used in maintaining the economy.

Despite the government attempts to make tax be one-sided, it yields little or no result in favour of the poor as they end up being well tax as same as the rich. Those who are poor make use of services regularly, and most societies have them than those who are already established. The labor supply curve for a wealthy individual is usually more elastic than a poor person's labor supply curve. We would realize that we have more poor people in labour than those who are rich.