Exercise 7.1:
Why does an inheritance tax generate so much more passion than other types of taxes?

If you have listened to the news any time in the past year you are aware that the topic of an inheritance tax is being hotly contested. Some believe that the mere existence of inheritance taxes is causing small, family-owned businesses to vanish from the American landscape. Others are arguing that the inheritance tax is one means of keeping an economic "royalty" from emerging in America. There is, as is usually the case in such arguments of political economy, probably more heat than light in both arguments; neither is completely true nor completely false. The question which comes to mind though is; why so much passion over this issue?

As in most truly controversial issues, the answer is neither clear nor simple. We must consider the very nature of inheritance-this is how families accumulate across generations. This is how parents care for their progeny through the generations. Thus a great deal of the passion comes from the very nature of the family.

However, there is an economic observation that serves to shed some light on the depth of passion over this issue. Any tax is, in effect, a reduction in the combined producer and consumer surplus generated by the exchange of economic goods. In this case the producer surplus and the consumer surplus accrue to the same individuals, the inheritors. When a tax is placed on this surplus it is not divided between the seller and the buyer, as in most transactions; it is taken, in its entirety, from the inheritors. Thus the burden of this tax feels heavier than the burden of other taxes since it is concentrated. From the viewpoint of society it is neutral since the loss to the inheritors is a gain to the society at large, assuming the taxing agency provides wanted benefits with the tax collected. The concentration of the loss of individual surplus leads to a concentration of any objection to the tax and, therefore, greater passion in arguing either for or against the repeal of inheritance taxes.

Exercise 7.2:
Why Are Seniors Allowed To Register For Classes First?

Most colleges and universities determine when a student can register for the next semester's classes based on the number of credit hours the students has earned. The more credit hours a student has (and therefore the closer to graduation the student is) the earlier the registration time. Why is this policy so widely adopted by colleges and universities?

An important reason for allocating registration times based on credit hors earned is efficiency. This process assures that the students with the most pressing need for classes (their eminent graduation) have the greatest access to classes. Students earlier in their college careers have more flexibility in their course choices. They have options for what general education and elective classes to take. They may not have selected a major yet (or may be likely to change it along the way). The need to enroll in a particular class is not as high. But a student in the final semester before graduation has a set schedule of courses to complete for graduation. Failure to get into those classes means no graduation!

Compare this with the airline policies for overbooked flights discussed in the textbook chapter. With a first-come, first served policy, airline seats were not allocated to those individuals with the more pressing need to arrive at a destination on time. Those with more flexibility could arrive early and get the available seats, even though they are able to be more flexible! When the airlines moved to a policy to solicit volunteers to give up their seats in return for a free ticket, rather than bumping passengers off the flight, it led to a more efficient allocation of airline seats (and happier passengers).

So could a university move to overbooking classes and offering incentives to student to give up their seats in an overbooked class as a way to assure that those with the greatest need get available seats? That would certainly cause a number of issues, (including increased costs)! However, identifying priority for registration based on the number of credits earned is an alternative way to allocate seats more efficiently.