Peer review assignment 2

Q1: Optimal level of tax rate

The optimal tax rate is the price at pt, so the tax rate is p0-pt. At this point they have accounted for
the per unit externality costs. Area A is transferred from consumer to the government and area C is
the welfare lost of the consumer because of the decrease in consumption of the sugar-sweetened
beverages. They transfer A + C from consumer to government and a further increase in government
funds (area B).

Q2: example grace subsidies

Study discount (subsidy) if you complete your study within 5 years. This is an internality and
increases positive behaviour for students to study more (instead of partying). This decreases their
study loans and increases their average income due to working earlier in life and have to pay of less
debt.

It could also be an externality because students will likely to participate in the labour force earlier,
paying more taxes, reducing the problem of aging and pensions, etc.

Q3:

No, when consumers are biases and face problems of self-control and time-inconsistency they might
not act in their own best interest.

They will definitely not agree with taxes on beverages imposed immediately, because they like to
consume more of then in stead of less (problem of self-control)

You would not know if they will agree for taxes imposed next year, it depends on if there is a choice
now of in a year (they will probably choice in a year and consume now), or if they have to agree for
taxes imposed in a year or not. (then they will probably choose not because they have no self-control
and not act in their best interest (Healthwise).

Q4:

Is says that if the poorer consumers pay more in taxes because they consume more sugar-sweetened
beverages. So if the increase in tax decreases consumption for the poor and not for the non-poor,
the tax is regressive. So it depends on the elasticity of the sugar-sweetened beverages for the poor
compared to the rest of the consumers. So the higher the price elasticity of demand of the poor, then
the corrective benefits are large relative to the financial burden, making tax less regressive. But if is
has little effect on consumption (low elasticity of demand), the benefits are relatively small.
Q5:

The optimal tax rate will decrease because when tax avoidance is possible. The incentives for tax
avoidance will be lower when people have to pay less taxes. With higher taxes, people will try to find
ways to avoid tax, when the utility of paying extra is smaller than the utility of risk associated with
the avoidance of tax, then people try to find ways to avoid, by for example buying products in other
countries. But, this lower tax rate is not welfare improving, the effect on sugar consumption will have
more effect on a higher tax rate than on a lower one.

Q6:

The amount of wage earned by someone is an exact number, and easy to trace back (high detection
possibility and thus easier to check for governments), and this is not the case for the earning of self-
employed. The risk of misreporting is not worth the risk because of the consequences of tax evasion.
But the scope of this risk and the consequences also depends on the punishing threat. There are also
more factors that could play a role, for example, tax morale, social norm and civic duty.

Q7:

It tells us that high-income taxpayers are not fazed by audit letter, and the size of the penalty and the
risks of getting caught is not high enough for them to report all of their income. They view the audit
as a negotiation and their reported taxable income as the opening bid. The negotiation will not
always result in penalizing noncompliant taxpayers, or determining all of them.

Q8:

Probably, when the probability of not getting caught is almost zero, few people will comply with
paying the taxes. The probability of a penalty is then also zero and there are no incentives to pay the
taxes. Only factors such as intrinsic roles may play a role, if they however outweigh the financial
benefits, which they probably will not.

Q9:

Q10:

Whenever tax avoidance is legally possible, tracing back and determining the total amount of illegally
avoided tax will become much harder. The optimal effort for reducing tax evasion increases then.