Answered: What is wrong with this answer?

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

ChapterST1: Government Spending And Taxation

Section: Chapter Questions

Problem 3CQ

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Question

In 1989, Senator Bob Packwood asked Congress’s Joint Committee on Taxation how much extra revenue the government would raise if it just started taxing 100% of all income over $200,000 per year. The Joint Committee crunched some numbers and reported an answer: $204 billion per year.

a. What is wrong with this answer?

In 1989, very few people made over $200,000 a year, so the estimate of the tax revenue is far too high.

Increasing government spending by $204 billion each year would have generated economic growth, and subsequently even higher amounts of tax revenues.

The Joint Committee on Taxation did not have the tools needed to make such an estimate accurately.

No one would have an incentive to work once they had earned $200,000, so much of the taxable income would disappear.

Definition Definition Increase in the amount of goods and services produced by a country in a given period of time compared to an earlier period. Economic growth is generally coupled with a rise in national income or the purchasing power of individuals. It is often measured in terms of the increase in a country's gross domestic product (GDP), or the overall monetary value of all the complete or final services and goods that a country can produce within its domestic boundaries in a specific period.

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