You are advising the government on how to pay for national defense. There are two proposals for a tax system to fund national defense. Under both proposals, the tax base is an individual's income. Under proposal A, all citizens pay exactly the same lump-sum tax, regardless of income. Under proposal B, individuals with higher incomes pay a greater proportion of their income in taxes. a. Is the tax in proposal A progressive, proportional, or regressive? What about the tax in proposal B? b. Is the tax in proposal A based on the ability-to-pay principle or on the benefits principle? What about the tax in proposal \(\mathrm{B}\) ? c. In terms of efficiency, which tax is better? Explain.

For proposal A, everyone pays the same lump-sum tax, regardless of their income. This means that lower-income individuals pay a higher proportion of their income in taxes compared to higher-income individuals. Therefore, the tax in proposal A is regressive. On the other hand, proposal B requires higher-income individuals to pay a higher proportion of their income in taxes. This indicates that the tax in proposal B is progressive.

Proposal A is based on the benefits principle, as the tax is the same for everyone irrespective of their income. Every individual is assumed to receive the same level of benefits from the government's national defense spending, so they pay the same amount in taxes. In contrast, proposal B is based on the ability-to-pay principle. This principle suggests that people with higher incomes should pay higher taxes because they have a greater ability to pay. Therefore, the tax structure in proposal B reflects this principle by having higher-income individuals pay a greater proportion of their income in taxes.

In terms of efficiency, we need to consider the impact of the two tax proposals on economic behavior and the overall tax collection process. Proposal A, being a lump-sum tax, does not distort individuals' economic decisions as it does not change with income. Since everyone pays the same amount of tax regardless of income, there is no disincentive to work more or earn additional income. As a result, proposal A can be considered more efficient as it has fewer negative effects on individual incentives and productivity. However, in Proposal B, higher-income individuals face higher tax rates, potentially discouraging them from pursuing additional income. This can lead to a reduction in overall economic activity and may even encourage tax avoidance and evasion. In terms of efficiency, this makes proposal B less efficient than proposal A. In conclusion, while proposal A is regressive and based on the benefits principle, it is generally more efficient compared to the progressive and ability-to-pay based proposal B.