Lower income tax, higher paycheques -Is it as good as it sounds?

The following are some examples from previous year student work on Microeconomics, which might help you to get some sense of your work .

1. Lower income tax, higher paycheques -Is it as good as it sounds?

Michigan state representative Lee Chatfield has announced a new bill to reduce personal income tax starting from 2018 and bring it down to zero over next 40 years. However, does making individual residents wealthier by the cost of cutting state income benefit everyone? Lost state revenue must be made up in other ways, which may not be pleasing to all.

The biggest portion of Michigan’s revenue is the income tax, generating more than $9 billion annually. This is the money used by the government to build roads and schools, improve transportation systems, fund college students and other projects that are aimed to better the life for the residents of the state. If such a large chunk of money stops flowing into the state budget, government initiatives will be put under risk of not being approved for the lack of financial support. This may slow down infrastructure development and improvement, making the state a less desirable place to live.

The officials are claiming that the Michigan state economy is on the rise and there is a budget surplus, which allows them to make this decision. The expectation is that lower income taxes will attract more residents and businesses that will create more jobs. State Senator J. Brandenburg has said that influx of people will result in higher tax revenues for the state. However, this is only an expectation and the state hasn’t announced a clear plan on how to make up for the lost revenue, so the whole idea sounds less convincing.

This bill is not a new practice -7 states currently have no income tax. Methods to make up for the revenue loss are simple -raise other taxes. Tennessee has the highest sales tax in US and New Hampshire has one of the highest property taxes. Other states have high gasoline and natural resources taxes. This all results in a higher than average cost of living in these states, which includes prices on housing, food, health care, etc. Residents are earning more, but they also end up spending more money on everyday needs. Current tax burden (amount of money deducted for taxes from one’s paycheque) for the lowest 20% of the income class is around 11% and top 1% of the population is at 5%. Higher taxes on food, gas, and property will hit the poor, who earn just the minimum wage, harder than the others.

As seen from the practice of the aforementioned states, this method of raising wages does not necessarily make residents wealthier in the long run. Kansas is an example of things going wrong -tax cuts from businesses and individuals have resulted in budget shortfalls and slow job growth. A comprehensive study must be conducted and presented to answer questions like: how likely are businesses to move to the state? or what is the current wealth distribution among residents? Cutting income tax simply shifts the tax from paycheques to bills and it is not necessarily a good thing.

Original article:

“Michigan Republicans Roll Out Plan To Eliminate Income Taxes” from 01/11/2017 at http://www.huffingtonpost.com/entry/michigan-income-tax_us_5876e4d0e4b092a6cae54bc

2. What Goes Around, Comes Around on the Autobahn

For decades, the slogan “Freie Fahrt für freie Bürger” (Free driving for free citizens) lingered throughout German society. There was always an implicit agreement between citizens and their leaders in regards to free-of-charge public highways. In 2013, however, a new law was passed by German transport minister, Alexander Dobrindt, enforcing payment for the use of the Autobahn motorway. As millions of travelers entered the Autobahn from Austria and Switzerland annually, they were now required to pay 8.90€ for 10 days of usage or a yearly price of 86.40€. Subsequently to the charges, immediate disputes broke out throughout Europe. Recently, the Austrians made a claim that they regard this law as a friendship betrayal from their neighboring country. They teamed up with the Netherlands, intending to sue Germany in the European Court of Justice for “discriminating against the citizens of other [European Union] member states”. Nevertheless, Germany’s actions were based on economical-thinking and well developed smart-choices.

Generally, free motorways produce positive externalities, or benefits that are enjoyed by parties other than the providers of the roads. In this case, the externalities were simple: foreigners used the public Autobahn without paying for any land taxes, construction costs, or maintenance fees. A free-rider problem arose when non-paying drivers benefited from the actions and investment of the government. Although the public enjoys receiving free benefits, the parties involved in providing them often lose motivation to continue their work without appropriate compensation. When this occurs, all parties, including drivers on the Autobahn, must consider the smart social choice as a priority over the smart private choice of the free-riders.

Consequently, the German government used smart economic thinking to fix the issue. They established property rights for the motorway. By charging tolls for entrance, they were able to remind the free-riders that there is ownership to the road and that its benefits need to be paid for. Through this lens, Germany aims for an outcome that is both efficient, in regards to getting paid for externalities, and equitable. Prior to the road-tolls, Germans were required to pay similar prices for entering the Austrian and Swiss Alpine motorways. Now, Germany is also charging a toll, and is able to achieve an equitable solution by treating the Austrian citizens the same way that they treated German travelers.

Recently, Austrians protested new German tolls that only apply to foreign “free-riders” of the Autobahn. Still, to pay for the externality domestically and reach the socially responsible equilibrium, Germans increased their carbon tax for German citizens.

Regardless, the Austrians are appealing to the European Union because they fear that the tolls will decrease their citizens’ demand to travel. This fear translates into a lack of confidence and balance between the needs of citizens and their influence on the Austrian government. In fact, Austria initiated the controversy by charging their own motorway fees. Therefore, it should be no surprise for the Austrian government, as well as the European Union, when Germany introduces and enforces tolls on the Autobahn.

Another european crisis; motorway charges. (2017, Jan 07). The Economist, 422, 24-43. Retrieved from http://myaccess.library.utoronto.ca/login?url=http://search.proquest.com/docview/1856037446?accountid=14771