Tax Reforms in the United States - Assignment Example

Name: Professor: Subject: Economics Date: Question 1 Application of indifference curves Indifference curve shows similar level of satisfaction for a consumer who is presented with different combinations of goods. At any point on the graph, the consumer is indifferent. In that case, therefore, a consumer can choose any point on the indifference and will get same satisfaction from the two combinations of the goods. Indifference curve can be used to rank consumer preferences with respect to two bundles of goods. A firm can be faced with intricate situation where numerous products are competing. Systematically these products are classified according to common traits then subjected to rank using indifference curves. When looking at rank of bundles of goods, it is imperative to pay attention to properties of indifference curves. One of the properties states that a consumer is well off on an indifference curve that is farther up and located to the right as shown in figure 1. Higher indifference curve represents larger quantities while lower indifference curve represents lower quantities. Figure 1: Indifference curve Figure 1 is an indifference curve showing that a consumer would be better off at a point on indifference curve Y as opposed to point a point on indifference curve X. This is because curve Y is located on a higher indifference curve compared with curve X. At a point on Y, a consumer is able to access more combination of the two goods. The gradient of an indifference curve measures marginal rate of substitution i.e. amount of good P that must be replaced so as to make up for loss of good W. Noting that a consumer would rather consume more of both goods, the best option is to move to a higher indifference curve. By observing points that are on higher indifference curve, a person can easily rank combination of goods. Indifference curve can also be applied in deciding products that can be subsidized by the government. Assuming a consumer shows preference for bananas and milk and earns an income of $100 per week. If the price of milk is $2 per kg, and the consumer spends all income on milk, the consumer will be able to buy 50 packets and zero bananas. Convinced that milk is good for a consumer, the government can subsidize the price of milk; for every $2 spent on milk, the government settles $0.50. The cost of the milk to the consumer is now $1.50 per packet. Because of the subsidy, the consumer is now able to buy more milk if he chooses to spend all income on milk. This entire process is a move to a new budget line. Indifference curve is further applicable in consumer price index. CPI measures the cost of purchasing a specific bundle of goods. Substitution bias occurs due to the difference between increase in average price of a bundle of commodities and the minimum increase required to sustain original satisfaction level. This is particularly important to government in examining quality of life i.e. consumer’s ability to meet their satisfaction level. Firm’s increasing sensitive to the application of indifference curves The main rationale for the current increasing sensitive to the application of indifference curves is the extensive choices that face a consumer on a daily basis. A firm can employ indifference curves to map out possible demand patterns for consumers then proceed to avail a product that is moves the consumer to higher indifference curve and budget line. Constructing and interpreting indifference map for corporate strategy Indifference map gives a set of indifference curves that represents all possible levels of utility that can be attained by combining various products. An indifference map is said to be constructed when a series of indifference curves have been represented on a graph (McEachern, 133). The starting point for construction of an indifference map is the recognition of the fact that consumer demand is influenced by tastes, income, expectations, and price of other goods. Using indifference curve, a demand curve can be constructed. The table shows various combinations of milk and bread that offer same satisfactions. Combination Milk Bread Q 4 2 R 2 4 S 3 3 When these points are joined together, they form an indifference curve such that a consumer is indifferent in choosing a combination that is on the curve. In some instances however, there can be a combination P made up of 4 milk and 4 bread. This will be preferred by a consumer because more utility is realized. Other combinations yielding different level of satisfaction can be produced in order to decide on an indifference curve yielding maximum satisfaction. This collection of indifference curves makes up an indifference map shown in figure 2. Figure 2: Indifference map It is important to note that amount of resources available to a consumer determines where a consumer will derive satisfaction. A budget line would come into play to assist in determining combination that a consumer can afford at a given price and income level. When a budget line is introduced on an indifferent map, optimal consumption will be obtained by examining where the budget line is tangent to an indifference curve i.e. point E. Budget line is however not fixed at this point. The budget line will change as price of the goods change. Optimal consumption will also change as price of a good change. In his case, when price of milk reduces, consumer will demand more quantities. This results in a demand schedule and a demand curve. The information is critical to management who will now proceed to settle on a price that will not hamper satisfaction level required by the consumer. Additionally, indifference map is the basis for forecasting sales and drafting market strategies. Analysis of indifference map and demand curve will also illustrate expected profits and risks facing management. Under such a situation, the management will choose indifference curve that gives the highest profits with the least risk. Question 3 United States Corporate Tax Rates Among developed countries, United States runs one of the highest corporate tax rates in the world, ranking the second after Japan. Federal corporate tax in addition to state taxes cumulatively raises the rate of tax. United States tax system requires that United States companies should pay taxes in the country where profits were derived and the remained subjected into domestic rate after giving some breaks. This is a disincentive to investment and economic growth. Moreover, these high taxes on profits generated abroad discourage managers from taking back profits to United States for purposes of reinvestment. Advancement in technology coupled with globalization has created avenues for companies to migrate across the borders to regions that are conducive. To illustrate impact of high corporate tax, it is imperative to mention California that has registered high relocation of companies because of unfavorable tax regime. Besides, the government incurs high cost involved in monitoring companies and their tax returns. Companies that are based in United States currently face intense competition from non-OECD countries that have corporate tax rate below the one in United States. China, Hong Kong, Malaysia, Singapore, and Taiwan run a low corporate tax rate. Aside from low tax rates, these non-OECD countries offer incentives such as tax holidays consequently further reducing tax rates. A look at the number of Fortune Global 500 companies with head offices in United States and Japan have consistently fallen due to high rates of corporate taxes. Exit of these large companies implies that unemployment would grow. Despite numerous changes in tax systems in many countries, United States have maintained high rate of corporate taxes. This shows that United States does not respond to the need for tax reforms in line global business environment. There is need for United States to appreciate the fact that companies are now taking advantage of differentiated tax to pursue their investment needs. Regardless of the disadvantages mentioned above, corporate tax plays a critical role in distributing tax to achieve a progressive system. By looking at the burden of settling corporate income tax, most of the burden falls on owners of equity while the remaining small portion is paid by labor income in the form of lower wage. This means that those earning more income end up paying more tax as opposed to low-income groups. Secondly, corporate tax is a major source of government revenue. The revenue has enabled United States to offer different services to Americans. Through the same taxation, the US economy has grown in the post war period to achieve the status of a developed country. My own position is that tax reforms in United States are indispensible. Lower corporate rate would ensure that United States is competitive in the globalized economy. Now, there is increased cross boarder capital flows hence United States government ought to realize that capital flows are sensitive to tax differentials. Countries whose corporate tax is low would end up attracting these cross border capital flows. Other than increased capital inflows, low corporate tax increases employment and welfare of American people. When corporate tax is high, investors are not the only ones who bear the burden of tax. Workers as well pay for this burden by way of declining employment opportunities and declining wages. Thirdly, lower taxes reduce economic inefficiencies caused by tax-based economic decisions. As an example, double taxation influences capital investment decisions since effective tax rate is increased. The other advantage of reforming corporate tax is that a lower rate would make US based companies competitive on a global arena. This encourages exports, capital inflow, productivity, and job creation in the domestic market. Works Cited McEachern, William. Microeconomics: A Contemporary Introduction. London: Cengage Learning, 2013. . Read More