Pedagogy in Action > Library > Teaching with Simulations > Economics Examples > Tax Game

Tax Game

Mark Maier Glendale Community College (CA)
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Summary

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The link between taxes rates and income distribution, or tax incidence, is an important concept in economics principles courses. The Tax Game simulation requires a student to set tax rates for a mythical economy, including the: income tax, property tax,wealth tax, payroll tax, corporate income tax,sales tax,and excise taxes. The student can choose any rates he or she wishes, but must achieve a given revenue target. After the rates are selected, the simulation calculates the Gini coefficient for the student's tax system and the student can readjust taxes to achieve a more desirable outcome. The simulation is most appropriate for economics principles courses. The Tax Game was developed by Mark Maier at Glendale Community College (CA).

Learning Goals


After completion of this activity, students should be able to:
  • Explain the link between a tax system and income distribution.
  • Identify the different distributional effects of different taxes.
  • Justify the chosen tax incidence.

Context for Use

The example is most appropriate for a microeconomics principles course. The example will generally be used in the second half of the course.

Description and Teaching Materials

The simulation is available on the web at The Tax Game. It can be used as an interactive lecture demonstration. The student instruction screen is shown below.

Tax Game jpg
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Tax Game open screen[creative commons]
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After entering a set of tax rates, the simulation returns the following information.

Tax Game summary jpg
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Tax Game summary jpg[creative commons]
Reuse: This item is offered under a Creative Commons Attribution-NonCommercial-ShareAlike license http://creativecommons.org/licenses/by-nc-sa/3.0/ You may reuse this item for non-commercial purposes as long as you provide attribution and offer any derivative works under a similar license.



TIME REQUIREMENTS:
Instructor preparation: One hour.
Class preparation: One 50 minute class period.
Class simulation: One 50 minute class period.

Teaching Notes and Tips


  • Prior to running the simulation, students need to know the following about taxes:
    • Marginal vs. average tax rates as applied to income taxes
    • Approximate current US federal income tax rates
    • Impact of tax deductions for home mortgage interest and for dependents
    • Impact of the cap on social security portion of the payroll tax (about $100,000)
    • Difference between income and wealth
  • While the specific equations driving the simulation are a "black box" to students, the instructor should go over the revenue elasticity assumptions of each tax to the point that students have some sense of why tax rates have different revenue effects.

  • For small classes, the simulation can be used to structure a group or cooperative learning exercise. The decision on which tax rates to choose and why thus becomes collaborative and not individual.

Assessment

  • The simulation can be the source for student writing assignments. Require students to submit the summary print out with answers to questions such as:
    • For each of the taxes, explain the choice you made for the tax rates. If relevant, also explain any choices you made for deductions or caps. In other words, why did you choose each number you entered in the simulation. In justifying your choices, please refer to the progressive or regressive impact of each of these taxes.
    • For one tax choice, explain why you changed it during the game.
    • Explain carefully why you are pleased with the Gini coefficient for your country. How does it differ from the Gini coefficient for the US?

  • Depending on the instructor and course structure, the simulation can also be used to explain why economists disagree about the effects of different taxes. Likely contemporary political debate will focus on precisely the tax choices required in the simulation.

  • After the students have developed their own tax systems, the instructor can show them how their tax systems compare with the current tax system. Data is available at the Tax Policy Center.

References and Resources