QUESTION 1

Which statement is most likely to explain why a government decides to increase the highest rates of tax on personal income?
A It expects total tax revenue to be unaffected by the policy change.
B It is concerned about the possibility of emigration by some high earning individuals.
C It regards equity considerations as being more important than efficiency ones.
D It wishes to switch the emphasis of its tax system from direct to indirect taxation.
[J17/P3/Q14]

The most likely statement that explains why a government decides to increase the highest rates of tax on personal income is option C.

It regards equity considerations as being more important than efficiency ones.

This means that the government prioritizes the goal of achieving a fair distribution of income over maximizing economic efficiency. By increasing taxes on higher incomes, the government aims to reduce income inequality and ensure that wealthier individuals contribute proportionally more to public finances.

Now, let's analyze the other options:

A) It expects total tax revenue to be unaffected by the policy change.
This option seems unlikely because increasing the highest rates of tax on personal income may lead to changes in taxpayers' behavior, such as reducing work effort or using tax planning strategies, which could impact total tax revenue.

B) It is concerned about the possibility of emigration by some high-earning individuals.
As mentioned in the explanation you provided, this option is incorrect because such a policy could indeed encourage high-earning individuals to emigrate or engage in tax avoidance schemes to reduce their tax burden.

D) It wishes to switch the emphasis of its tax system from direct to indirect taxation.
This option is also unlikely to be the main reason for increasing the highest rates of tax on personal income. Switching from direct to indirect taxation involves different economic considerations, and increasing personal income tax rates would not directly lead to such a shift.

In summary, option C is the most plausible explanation for the government's decision to increase the highest rates of tax on personal income, as it reflects a focus on equity considerations rather than efficiency concerns.





QUESTION 2

A government wishes to discourage tax avoidance.
Which policy to achieve this would be an example of the behavioral approach of nudge theory?
A compelling direct tax deduction by employers
B making random inspections of individual tax records
C providing information on how the tax is spent by the government
D using penalties, such as fines and imprisonment for tax avoidance

The correct answer is Option C, which is providing information on how the tax is spent by the government, would be an example of the behavioral approach of nudge theory.

Nudge theory, also known as behavioral economics, suggests using positive and indirect methods to influence people's behavior and decision-making without mandating or forcing them to comply. By providing information on how tax money is utilized by the government for public services and welfare programs, individuals may be more inclined to voluntarily pay their taxes and feel a sense of social responsibility.

Now, let's analyze the other options:

A) A compelling direct tax deduction by employers:
This option involves a direct and forceful approach, which goes against the principles of nudge theory. Employers would be required to make tax deductions from their employees' salaries, leaving individuals with less discretion and choice in the matter.

B) Making random inspections of individual tax records:
Random inspections involve a form of enforcement and may be seen as coercive, which is not in line with the nudge theory's gentle and indirect approach.

D) Using penalties, such as fines and imprisonment for tax avoidance:
Penalties are a form of punishment and enforcement, which is contrary to the concept of nudge theory. While penalties can be effective deterrents for tax avoidance, they do not align with the idea of using positive and indirect suggestions to encourage compliance.

In summary, option C is the correct answer as it exemplifies the behavioral approach of nudge theory by providing information to promote voluntary compliance and discourage tax avoidance without resorting to forceful measures.