eco question

Econ 4310

State and Local Finance

Homework #7 (20 points)

Due: April 19 at 11pm

Submitted to Carmen

Notes:

1. Any submitted documents that cannot be opened will not be graded and receive a zero.

2. Do your own work. You may work together, but you answers should not be the same. Answers considered to be the same will be graded as a zero.

3. Start each new question on a separate page.

1. According to the “benefit principle” of taxation, a business’ tax in a state should be related to the benefits to the business from services provided by the state and local governments. Practically, a firm’s business activity or tax base is usually divided among states based on the state’s share of the firm’s capital, employment, and/or sales. Discuss how well each of those components of the allocation formula might correspond to service benefits. Does a firm with sales (through the internet or mail order, perhaps) but no employees or capital in a state benefit from any state or local government services?

2. Gross receipts, value added, and net income are three different potential business tax bases. For each of three firms—an automobile manufacturer (assembly plant), a food retailer, and a private-practice physician—list the components of each potential tax base and describe how the bases differ among each other for one tax and among the three taxes.