Activity #1: Cloydtown, USA[i]
Like many growing cities, Cloydtown’s expenditures for roads, schools, parks, law enforcement and other services have grown faster than its tax revenues. The town council estimates that $10 million of additional annual tax revenue is needed to balance the town’s annual operating budget. Although everyone on the town council agrees on the need for additional expenditures, there is widespread disagreement about how to raise the additional tax revenue. Three alternatives are under consideration—
1. 2% payroll tax on gross wages.
2. 3% sales tax on all retail purchases (food, clothing, books, clothing, etc.). 3. 10% increase in real estate property tax.
Cloydtown’s budget director estimates that the three alternatives are equivalent in the sense that each would generate approximately $10 million of additional tax revenue per year. However, these alternatives differ in terms of who would bear the additional tax burden.
Cloydtown is comprised of three demographic groups, each representing approximately one-third of the total population: retirees, workers, and students. As shown in the following table, each group’s share of the wage base, consumption base, and property base differs, as one would expect given typical life-cycle patterns of income production, consumption, and savings.
|Equal-size |Demographic Group’s Share of Each Tax Base | |Demographic Groups |Wage Base |Retail Sales |Real Property | |Retirees |5% |20% |60% | |Workers |90% |50% |40% | |Students |5% |30% |0%...
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