Tax Policy, Sustainability and the Future of Taxation

Introduction and context

Taxation is no longer understood merely as a mechanism for financing public expenditure. It is also an instrument for influencing behaviour, distributing resources, correcting market failures, supporting economic resilience and expressing social choices. Contemporary tax policy must therefore be assessed simultaneously as a fiscal, economic, administrative, technological and ethical institution.

Three developments make this task especially demanding. First, economic value is increasingly created through intangible assets, data, algorithms and cross-border digital platforms. Second, environmental pressures require governments to change the relative prices of carbon-intensive activities while protecting households and competitiveness. Third, automation, artificial intelligence, crypto-assets, remote work and platform labour are challenging traditional concepts of residence, employment, income and reporting.

This chapter evaluates tax expenditure, behavioural responses, distributional impacts and reform design. It then applies these ideas to digital-economy taxation, the global minimum tax, environmental taxation, crypto-assets, platform work and real-time reporting. The central argument is that technically efficient taxation is insufficient unless it is also administrable, legitimate, equitable and adaptable.

Learning objectives

By the end of this chapter, the reader should be able to:

1. Explain tax expenditure and evaluate it using principles of transparency, efficiency and equity.
2. Analyse taxpayer behavioural responses and distinguish statutory from economic incidence.
3. Assess distributional effects across income groups, generations, regions and business forms.
4. Evaluate major reforms concerning digital business models, global minimum taxation and environmental externalities.
5. Explain the tax implications of crypto-assets, platform work and real-time reporting.
6. Recommend governance arrangements and professional capabilities for the future tax environment.

1. Tax policy as a multidimensional choice

A tax system performs several functions:

• Revenue raising: financing public goods, social protection and administration.
• Redistribution: changing the post-tax distribution of income and wealth.
• Allocation: correcting externalities and influencing investment, saving and consumption.
• Stabilisation: supporting macroeconomic management over the economic cycle.
• Legitimacy and institution building: creating a visible relationship between citizens, businesses and the state.

These functions may conflict. A broad consumption tax can raise substantial revenue with relatively low collection costs, but may be regressive when measured against current income. A high marginal tax rate may improve progressivity but create incentives for avoidance, reduced labour supply or incorporation. A carbon tax can improve environmental outcomes but impose concentrated costs on energy-intensive households and industries.

A useful policy framework evaluates each proposal through five questions:

1. What problem is being addressed?
2. Which tax base is most closely connected to that problem?
3. Who bears the economic burden after behavioural adjustment?
4. Can the measure be administered and enforced?
5. What compensating or complementary policies are required?

Tax design should also distinguish between a rule's legal form and its economic effect. The person legally responsible for remitting a tax is not necessarily the person who bears its cost.

2. Tax expenditure: invisible spending through the tax system

2.1 Meaning and rationale

A tax expenditure is a revenue reduction caused by a preferential tax treatment relative to an identified benchmark system. Examples include exemptions, deductions, credits, reduced rates, deferrals and preferential treatment of particular savings vehicles or industries.

The concept is powerful because a government may provide support either by direct expenditure or by allowing a taxpayer to pay less tax. A tax credit for research and development, for example, may pursue the same policy objective as a direct innovation grant. Yet tax expenditures are often less visible in budgets, less frequently reviewed and more difficult to compare with spending programmes.

There is no universally neutral benchmark. A broad income benchmark may treat an allowance for depreciation as a tax expenditure, while a normative income-tax benchmark may regard ordinary depreciation as a structural feature. Consequently, tax-expenditure estimates depend on classification assumptions.

2.2 Measurement

The simplest revenue-foregone estimate is:

where TE is estimated tax expenditure, R_b is revenue under the benchmark system and R_p is revenue under the preferential rule. The estimate assumes that taxpayer behaviour, economic activity and compliance would otherwise remain unchanged. This is a static estimate and is not necessarily the amount that could be collected if the preference were abolished.

A behavioural estimate incorporates changes in the tax base:

where B_b and B_p are the tax bases under the benchmark and preferential systems respectively, and R(·) represents the applicable revenue function. The behavioural estimate is more realistic but requires assumptions about investment, labour supply, avoidance, prices and administrative response.

The estimates must not be interpreted as automatically additive. Removing two preferences simultaneously may produce a different result from adding their separate estimates because taxpayers can switch between reliefs.

2.3 Evaluation criteria

A tax expenditure should be reviewed against:

• Additionality: Would the desired activity have occurred without the relief?
• Targeting: Does the benefit reach the intended population or activity?
• Efficiency: Does the gain exceed the behavioural and administrative cost?
• Equity: Is the benefit distributed fairly across income groups and sectors?
• Simplicity: Can taxpayers and administrators understand the rule?
• Durability: Is the measure suitable for periodic review rather than permanent continuation?
• Transparency: Is its fiscal cost disclosed alongside direct spending?

Tax expenditures frequently favour taxpayers with sufficient taxable income to use deductions and credits. A refundable credit may therefore be more equitable than a non-refundable deduction, although it can increase administration and fraud risk.

3. Behavioural responses and tax elasticity

Taxpayers respond to tax rules through changes in work, saving, investment, consumption, legal form, timing, location and compliance. Responses may be legal, such as changing the timing of a transaction, or illegal, such as concealing income. The policy challenge is to distinguish productive responses from socially wasteful avoidance and evasion.

A general behavioural elasticity can be expressed as:

The relevant behavioural variable may be reported income, labour supply, investment or migration. For labour income, a frequently used net-of-tax rate is 1 − τ, where τ is the marginal tax rate. This does not imply that all responses are caused by the marginal rate alone; benefits, payroll taxes, tax credits and institutional constraints may also matter.

Two effects are especially important:

• Substitution effect: taxation changes the relative reward from an activity, such as working an additional hour rather than taking leisure.
• Income effect: taxation changes disposable income, which may cause a person to work more or less depending on preferences.

For capital income, measured behavioural responses may reflect real investment changes, income shifting between labour and capital, use of debt, transfer pricing, changes in legal residence or timing. A high observed elasticity of taxable income does not necessarily mean a high elasticity of real economic activity.

Incidence

Tax incidence concerns who ultimately bears a tax. In a competitive market, a tax on sellers may partly reduce the price received by producers and partly increase the price paid by consumers. The division depends on relative elasticities, not merely on the legal wording of the statute.

For a per-unit tax, if demand is relatively inelastic and supply relatively elastic, consumers generally bear the larger share through higher prices. If demand is elastic and supply inelastic, producers generally bear more. Open-economy conditions, market power and mobility can significantly alter these conclusions.

4. Distributional impact and tax justice

Distributional analysis should cover more than annual income. A complete assessment may consider:

• disposable income by decile or percentile;
• wealth and asset ownership;
• lifetime income and consumption;
• gender, age, disability and household composition;
• regional and urban-rural effects;
• effects on workers, consumers and business owners;
• intergenerational consequences.

A tax is often called progressive when the average tax rate rises with income. If T(y) is tax paid by a person with income y, the average tax rate is:

A system is progressive over a range when ATR(y) increases as y increases. A tax can be progressive by income but regressive by consumption or wealth. Distributional conclusions therefore depend on the chosen denominator and unit of analysis.

A common inequality indicator is the Reynolds–Smolensky measure of redistributive effect:

where G_pre is the Gini coefficient before taxes and transfers and G_post is the Gini coefficient after them. The measure is descriptive; it does not by itself establish whether the resulting distribution is ethically desirable. It may also be affected by reranking, changes in labour supply and the treatment of in-kind services.

Policy evaluation should report both direct and indirect effects. A fuel tax may be progressive in cash terms if high-income households consume more fuel, but regressive relative to income if low-income households spend a larger proportion of their budgets on energy. Revenue recycling through targeted transfers, reduced payroll taxes or public transport investment can change the overall distributional result.

5. Principles and process of policy reform

5.1 Competing principles

Traditional principles include equity, efficiency, certainty and convenience. Modern reform also requires neutrality, resilience, privacy, environmental sustainability, administrative feasibility and international coherence.

A neutral tax system does not mean that all taxpayers pay the same amount. It means that taxation does not unnecessarily distort choices that would otherwise be made for economic reasons. Complete neutrality is rarely possible because tax policy deliberately addresses externalities and social objectives.

5.2 Reform sequencing

A robust reform process normally involves:

1. defining the policy objective and baseline;
2. mapping affected taxpayers and third parties;
3. estimating revenue, behavioural and distributional effects;
4. consulting on design and administration;
5. piloting data and reporting systems;
6. legislating with clear transition rules;
7. monitoring outcomes and publishing evaluation;
8. revising or withdrawing ineffective measures.

Reform credibility depends on predictability. Retrospective changes, unclear anti-avoidance rules and unstable filing requirements can reduce investment and voluntary compliance even where the underlying policy objective is sound.

6. Taxation of the digital economy

Digitalisation complicates taxation because value can be created remotely, intangible assets are highly mobile, users may contribute data or network value, and a business can access a market without a traditional physical presence.

Important issues include:

• identifying the location of value creation;
• allocating profits among related entities;
• distinguishing royalties, services, advertising and platform fees;
• applying transfer-pricing rules to intangible assets;
• collecting consumption taxes on cross-border digital supplies;
• managing withholding taxes and permanent-establishment thresholds.

The OECD/G20 two-pillar approach represents a major international response. Pillar One seeks a more market-oriented allocation of taxing rights for the largest and most profitable multinational groups, while Pillar Two introduces a global minimum effective tax framework, commonly associated with a 15% minimum rate for in-scope groups. Implementation depends on domestic legislation, accounting adjustments, safe harbours, information exchange and dispute prevention.

The global minimum tax is not a universal minimum tax on every company. It applies subject to scope, thresholds and detailed rules. A jurisdiction may impose a qualified domestic minimum top-up tax, while an income inclusion rule or undertaxed profits rule may allocate additional tax in specified circumstances.

Critical assessment

Benefits include limiting profit shifting, reducing incentives for tax-rate competition and improving the relationship between market participation and taxing rights. Risks include compliance complexity, disputes over accounting definitions, possible investment distortions and unequal administrative capacity between countries. Developing countries may receive limited benefit if they lack the capacity to administer complex rules or if treaty and incentive structures are not coordinated.

7. Environmental and carbon taxation

Environmental taxation applies the price mechanism to negative externalities. A carbon tax can be represented conceptually as:

where e is taxable emissions, measured in tonnes of carbon-dioxide equivalent, and p_c is the tax rate per tonne. The equation assumes emissions are measurable, the tax base is defined and the rate is expressed in currency per tonne. In practice, emissions may be estimated from fuel quantities using emissions factors rather than directly measured.

A carbon tax can encourage fuel switching, energy efficiency, innovation and lower-carbon investment. Its effectiveness depends on the responsiveness of emissions to price, availability of alternatives, time horizons and international leakage. A tax imposed only in one jurisdiction may shift production to less regulated jurisdictions, although competitiveness effects depend on technology and trade exposure.

A comprehensive policy package may include:

• a carbon price or emissions trading system;
• standards for vehicles and buildings;
• public investment in clean infrastructure;
• border carbon measures where legally and administratively justified;
• transitional support for affected workers and regions;
• targeted transfers or dividends for vulnerable households.

Environmental taxes are not automatically regressive. Distributional analysis must examine energy consumption, housing quality, transport dependence and how revenue is used. Transparency is essential: citizens are more likely to accept a carbon measure when its environmental purpose and compensation arrangements are credible.

8. Crypto-assets and blockchain-based activity

Crypto-assets create tax questions rather than a single new category of tax. Classification varies by jurisdiction and may distinguish payment tokens, investment tokens, utility tokens, stablecoins and non-fungible tokens.

Potentially taxable events include:

• disposal of an asset for fiat currency or another asset;
• exchange between crypto-assets;
• payment for goods or services;
• mining, staking and validation rewards;
• lending, liquidity provision and decentralised finance returns;
• employment compensation or business receipts in tokens;
• airdrops and token incentives.

The tax result usually depends on the taxpayer's status, intention, frequency, accounting records and local law. A business trading crypto-assets may face ordinary business taxation, while an individual investor may face capital gains treatment, but this distinction cannot be assumed universally.

Key risks are valuation at the time of a transaction, incomplete records, lost private keys, pseudonymous ownership, offshore exchanges and rapidly changing protocols. Tax administrations increasingly seek information from exchanges and blockchain analytics providers. However, analytics are probabilistic and must be supported by due process, verification and privacy safeguards.

Professionals should advise clients to maintain transaction-level records including date, asset, quantity, fair-market value, wallet or exchange, fees, counterparty where known and purpose. Advice should not treat blockchain visibility as equivalent to legal identity.

9. Platform work and the changing employment boundary

Digital platforms connect customers with drivers, couriers, freelancers, tutors and other service providers. The tax challenge is not merely whether a worker is an employee or an independent contractor. It also concerns registration, withholding, social contributions, deductible costs, benefits, reporting and cross-border supply.

Misclassification can shift costs from firms to workers and reduce access to social protection. Conversely, imposing employment rules without considering genuine autonomy can reduce flexibility. Relevant indicators may include control, substitution rights, integration, entrepreneurial risk, pricing power, equipment, exclusivity and the economic reality of the relationship.

Platform reporting regimes can improve compliance by requiring digital platforms to collect and report seller identity, jurisdiction and transaction information. Reporting is not itself taxation: tax authorities must match information, allow corrections and distinguish gross receipts from taxable profit. A courier's gross platform receipts, for example, may not equal taxable income after allowable vehicle, insurance and operating costs.

10. Real-time reporting, data and artificial intelligence

Real-time or near-real-time reporting uses electronic invoices, payroll submissions, transaction feeds and pre-populated returns to move tax administration closer to the point of transaction. Advantages include earlier error detection, reduced compliance costs, improved cash-flow visibility and more effective risk analysis.

Risks include excessive surveillance, cybersecurity incidents, incompatible systems, exclusion of small businesses and automated errors. Artificial intelligence can assist classification, anomaly detection, audit selection and taxpayer support, but it should not replace legal reasoning or procedural fairness.

Good governance requires:

• a clear legal basis and purpose limitation;
• data minimisation and retention controls;
• secure authentication and access logging;
• explainable risk indicators;
• human review of consequential decisions;
• appeal and correction mechanisms;
• testing for discriminatory outcomes;
• procurement accountability and independent audit.

A risk score is an administrative aid, not proof of non-compliance. Professionals must be able to challenge inaccurate data and explain the basis of a client position.

11. Illustrative case: Northstar Mobility Group

Background

Northstar Mobility Group is an illustrative multinational platform that operates a ride-hailing application, food delivery service and digital advertising network in six countries. It owns valuable algorithms in one country, contracts with drivers through local subsidiaries, processes payments through a related finance company and receives advertising income from users across all six markets.

Problem

The group reports modest taxable profits in market countries because payments for intellectual-property access, financing and regional services are deducted locally. Drivers are treated as independent contractors, although the platform controls pricing algorithms and allocates work. Several governments are considering a carbon levy on delivery vehicles and real-time platform reporting.

Analysis

A narrow legal analysis would examine contracts and existing transfer-pricing documentation. A broader policy analysis asks where customers, users, labour, data, risk and economic opportunity are located. It also considers whether the reported allocation reflects genuine functions and risks.

The tax expenditure question arises if Northstar receives a digital innovation credit. Authorities should test additionality: would the algorithms have been developed without the credit? The distributional question concerns whether the model shifts compliance costs and social-protection risks to drivers. The environmental question concerns delivery emissions and congestion. The administrative question concerns whether the platform can report transaction-level data accurately without exposing personal information.

Approach and solution

A coordinated response could include:

1. consistent transfer-pricing documentation for algorithms, financing and regional services;
2. market-jurisdiction taxation under applicable international rules;
3. platform reporting of gross payments, worker identity and jurisdiction, subject to privacy safeguards;
4. a clear worker-status test based on economic reality;
5. carbon pricing combined with investment in low-emission delivery and targeted support;
6. an advance ruling or cooperative compliance arrangement with audit rights;
7. independent review of the innovation credit after three years.

Outcome

The outcome is not necessarily the highest immediate tax collection. A sound result would align taxable income more closely with economic activity, protect workers from arbitrary classification, reduce emissions and give the group predictable compliance obligations. The case also demonstrates that tax policy, labour regulation, environmental policy and data governance cannot be designed in isolation.

Learning points

• Digital value is difficult to locate but not impossible to analyse.
• Gross platform data must not be confused with taxable profit.
• Tax incentives require evaluation, not automatic renewal.
• Environmental and distributional effects depend heavily on policy design and revenue use.
• Cooperative compliance can reduce disputes when supported by transparency and enforceable safeguards.

12. Professional capabilities for the future

Future tax professionals require more than technical knowledge of statutes. Essential capabilities include:

• interpreting international tax rules and accounting data;
• understanding data architecture, APIs, electronic invoicing and cybersecurity;
• using spreadsheets, statistical tools and audit analytics critically;
• assessing behavioural and distributional evidence;
• explaining uncertainty to boards, regulators and taxpayers;
• recognising ethical conflicts and conflicts of interest;
• documenting assumptions and preserving an audit trail;
• collaborating with economists, lawyers, engineers, data scientists and sustainability specialists.

Professional judgement remains central. Automated systems can calculate a liability, but they cannot independently decide whether a benchmark is conceptually appropriate, whether a tax incentive is legitimate or whether a distributional burden is acceptable. Those are normative and institutional questions requiring evidence, accountability and public reasoning.

Challenges and limitations

Tax policy analysis has unavoidable limitations. Behavioural parameters are estimated from historical settings and may not transfer to new technologies or reforms. Distributional models may omit informal activity, unpaid work, public-service benefits or wealth effects. Revenue forecasts are sensitive to macroeconomic assumptions. International measures can create overlapping claims and compliance costs. Digital data may improve detection while also reproducing biases in existing enforcement patterns.

There is also a political-economy problem: concentrated beneficiaries may resist reform more effectively than dispersed taxpayers can support it. Sunset clauses, independent evaluation, public tax-expenditure reports and parliamentary scrutiny can improve accountability, but none eliminates political choice.

Best-practice framework

A professionally defensible tax reform should:

1. state the objective and benchmark clearly;
2. distinguish legal incidence from economic incidence;
3. quantify static and behavioural effects separately;
4. publish distributional effects using more than one perspective;
5. test administrative feasibility before implementation;
6. protect privacy, due process and taxpayer rights;
7. coordinate domestic, international, labour and environmental rules;
8. include review dates, performance indicators and exit criteria;
9. provide accessible guidance and correction channels;
10. evaluate outcomes rather than relying only on legislative intention.

Chapter Summary

Tax policy is a multidimensional institution that raises revenue, redistributes resources, corrects externalities and shapes economic behaviour. Tax expenditures are forms of spending delivered through the tax system and should be benchmarked, measured, disclosed and periodically evaluated. Static revenue-foregone estimates differ from behavioural estimates because taxpayers change their actions when incentives change.

Tax incidence depends on elasticities and market conditions rather than statutory liability alone. Distributional analysis should consider income, wealth, consumption, household structure, region and lifecycle effects. Digitalisation has intensified challenges concerning nexus, intangible assets, platform reporting and profit allocation. The international two-pillar framework and global minimum tax seek to address these challenges but introduce substantial complexity.

Carbon taxation can correct environmental externalities, yet requires credible measurement, complementary regulation and fair revenue recycling. Crypto-assets require transaction-level records and careful classification. Platform work raises questions about employment status, reporting and social protection. Real-time reporting and AI can improve administration but require privacy, cybersecurity, explainability and human oversight.

The future tax professional must combine legal and accounting expertise with economic analysis, data literacy, ethical judgement and international awareness. Sustainable reform is not simply a matter of collecting more tax; it is the design of a legitimate, effective and adaptable fiscal system.

Key Terms

Tax expenditure: Revenue forgone because of a preferential tax provision relative to a benchmark system.

Benchmark tax system: The reference tax structure used to identify preferential treatment.

Tax incidence: The ultimate economic distribution of a tax burden.

Statutory incidence: The person or entity legally required to remit a tax.

Behavioural elasticity: The responsiveness of a behaviour to a change in a tax-related price or incentive.

Substitution effect: Behavioural change caused by a change in the relative reward between alternatives.

Income effect: Behavioural change caused by a change in disposable purchasing power.

Progressive tax: A tax for which the average tax rate rises with the relevant measure of ability to pay.

Tax neutrality: The principle that taxation should avoid unnecessary distortion of economic choices.

Externality: A cost or benefit imposed on third parties that is not reflected in a market price.

Carbon tax: A tax linked to the carbon content or emissions associated with an activity.

Tax base: The income, transaction, asset, consumption or activity to which a tax rate applies.

Digital nexus: A basis for taxation connected with meaningful economic participation in a market through digital activity.

Global minimum tax: Rules intended to ensure a minimum effective tax level for in-scope multinational groups.

Crypto-asset: A digitally recorded asset secured or transferred using cryptographic or distributed-ledger technology.

Platform work: Labour or services arranged through a digital intermediary platform.

Real-time reporting: Electronic submission or exchange of tax-relevant information close to the time of a transaction or payroll event.

Tax incidence: The final bearer of a tax after market and behavioural adjustments.

Cooperative compliance: A relationship in which taxpayers and tax authorities exchange information transparently to manage tax risk.

Tax governance: Structures and controls ensuring lawful, ethical, accountable and effective tax administration.

Review Questions

Short Answer Questions

1. What is a tax expenditure, and why does the choice of benchmark matter?
2. Distinguish statutory incidence from economic incidence.
3. What is the difference between a substitution effect and an income effect?
4. Identify two potential benefits and two risks of real-time tax reporting.
5. Why may a carbon tax require revenue recycling?

Long Answer Questions

1. Critically evaluate the argument that tax expenditures should be reported alongside direct government spending.
2. Explain how behavioural responses complicate the measurement of revenue from a proposed tax reform.
3. Assess the principal opportunities and limitations of the global minimum tax.
4. Discuss the tax, labour and ethical issues raised by platform work.
5. Evaluate how a tax administration can use artificial intelligence while protecting taxpayer rights.

Analytical / Application Questions

1. A government proposes a non-refundable tax credit for home energy improvements. Design a framework for evaluating its additionality, distributional effects, administrative cost and environmental effectiveness.
2. A multinational digital platform reports large payments for intellectual-property use to a low-tax affiliate. Analyse the information, transfer-pricing and international-tax issues that should be investigated.
3. A platform reports gross courier receipts to the tax authority, but couriers claim substantial vehicle and insurance costs. Explain how the authority should distinguish information reporting from taxable profit and design a fair compliance process.

Multiple Choice Questions with Answers

Question 1

Which statement best describes a tax expenditure?

A. A penalty imposed for late filing

B. Revenue forgone because of a preferential tax provision relative to a benchmark

C. A tax collected by a foreign government

D. Administrative expenditure by a tax authority

Correct Answer: B. Revenue forgone because of a preferential tax provision relative to a benchmark

Question 2

If demand is relatively inelastic and supply is relatively elastic, a per-unit consumption tax will generally be borne more heavily by:

A. Consumers

B. Producers

C. The tax authority

D. Foreign governments

Correct Answer: A. Consumers

Question 3

A static revenue-foregone estimate of a tax expenditure assumes that:

A. All taxpayers immediately change behaviour

B. The tax base is eliminated

C. Behaviour and the tax base remain unchanged

D. The tax is replaced by a subsidy

Correct Answer: C. Behaviour and the tax base remain unchanged

Question 4

Which measure is most directly associated with a global minimum tax framework?

A. A universal zero rate for small businesses

B. A minimum effective tax rate for in-scope multinational groups

C. A tax exemption for all digital services

D. A prohibition on consumption taxes

Correct Answer: B. A minimum effective tax rate for in-scope multinational groups

Question 5

A carbon tax is primarily intended to:

A. Reward tax secrecy

B. Correct a negative environmental externality

C. Replace all social-insurance contributions

D. Guarantee that emissions become zero immediately

Correct Answer: B. Correct a negative environmental externality

Question 6

Which item is most important for determining the tax treatment of a crypto-asset transaction?

A. The colour of the application's interface

B. The taxpayer's status, purpose, transaction and applicable law

C. Whether the asset has a paper certificate

D. Whether the transaction occurred on a weekday

Correct Answer: B. The taxpayer's status, purpose, transaction and applicable law

Question 7

Why is platform reporting not identical to determining taxable profit?

A. Reported gross receipts may differ from profit after allowable costs

B. Platforms never transmit financial information

C. Taxable profit is always equal to gross receipts

D. Workers are never responsible for tax

Correct Answer: A. Reported gross receipts may differ from profit after allowable costs

Question 8

Which is an essential safeguard when AI is used for tax-risk scoring?

A. Automatic assessment without appeal

B. Secret criteria that cannot be reviewed

C. Human review and a mechanism to correct inaccurate data

D. Permanent retention of every personal record

Correct Answer: C. Human review and a mechanism to correct inaccurate data

Question 9

A tax system is progressive over a range when:

A. The average tax rate falls as income rises

B. The average tax rate rises as income rises

C. Everyone pays the same cash amount

D. Only consumption is taxed

Correct Answer: B. The average tax rate rises as income rises

Question 10

Which question most directly tests the additionality of a tax incentive?

A. Would the activity have occurred without the incentive?

B. Was the incentive announced in a newspaper?

C. Does the incentive have a short title?

D. Was the tax rate rounded to a whole number?

Correct Answer: A. Would the activity have occurred without the incentive?