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
Description and Teaching Materials
After entering a set of tax rates, the simulation returns the following information.
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.
- 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.