Ch. 6: Funding the Public Sector

Using the above table, a unit tax of $2 is imposed on the product. How much of the tax is paid by the consumer?

$1

Capital loss

A negative different between the purchase price and the sale price of an asset.

Q) Using the above table, a unit tax of $2 is imposed on the product. How much of the tax is paid by the consumer?

A) $1

Q) Jamal earns $160,000 per year and Josephina earns $80,000 per year. If Jamal pays $16,000 in income taxes and Josephina pays $8,000 in income taxes, the income tax system would be regressive.

A) proportional.

Q) The U.S. Social Security tax is an example of a

A) regressive tax.

Q) Using the above table, a unit tax of $2 is imposed on the product. How much of the tax is paid by the producer? unable to determine

A) $1

Q) For all employee earnings subject to Social Security taxes, what is the current Social Security tax rate for employers?

A) 6.2%

Q) A 5 percent tax is going to be applied to a $100,000 tax base. What can be said about the revenue collected assuming static tax analysis?

A) The total revenue will be $5,000.

Q) Ad valorem taxes

A) are assessed as a percentage of a good's price.

Q) The three possible sources of government funding include

A) explicit fees, taxes, and borrowing.

Q) Suppose you are making $50,000 per year and paying $5,000 per year in income taxes. You get a $10,000 per year raise and your income taxes are now $6,500 per year. Based on this information, the income tax system is

A) progressive.

Q) Jamal earns $160,000 per year and Josephina earns $80,000 per year. They both pay the same price to buy the identical automobile and each pays $1,600 in sales tax. In relation to their relative incomes, this is an example of a

A) regressive tax.

Q) Using the fiscal year 2014 estimates, the largest component of state and local revenue is the

A) sales, excise, and gross receipts taxes.

Q) What determines the proportion of a unit excise tax that will be passed on to consumers in the form of higher prices?

A) the degree to which quantity demanded and supplied of the good respond to price changes

which of the following is true of excise tax?

An excise tax is levied on purchases of particular good or service.

An excise tax of ​$0.60 is levied on a product. As a result of the​ tax, the market price of the product goes from ​$3.00 to ​$3.45. How much of the tax does the consumer​ pay? A. ​$0.23. B. ​$0.45. C. ​$0.15. D. The consumer pays none of the tax.

B. ​$0.45.

An excise tax of 60 cents is levied on a product. As a result of the​ tax, the price of the product goes from​ $1 to​ $1.40. Which of the following is​ true? A. The producer pays the majority of the tax but not the entire tax. B. The producer pays the entire tax. C. The consumer pays the majority of the tax but not the entire tax. D. The consumer pays the entire tax.

C. The consumer pays the majority of the tax but not the entire tax.

How can we anticipate the proportion of a newly imposed unit excise tax that consumers will pay?

Consumers will pay most of the tax whenever their demand for a product is relatively unresponsive to price changes.

6-3 Learning Objective Understand the key factors influencing the relationship between tax rates and the tax revenues governments collect

Static tax analysis assumes that the tax base does not respond significantly to an increase in the tax rate, so it seems to imply that a tax rate hike must always boost a government's total tax collections. Dynamic tax analysis reveals, however, that increases in tax rates cause the tax base to decline. Thus, there is a tax rate that maximizes the govs tax revenues. If the gov pushes the tax rate higher, tax collections decline.

Government Budget Constraint

The Limit on government spending and transfers imposed by the fact that every dollar the government spends, transfers, or uses to repay borrowed funds must ultimately be provided by the user chargers and taxes it collects

6-2 Learning Objective Explain the structure of the U.S. income tax system

The U.S. federal government raises most of its annual tax revenues from individual and corporate income taxes and also collects Social Security and unemployment taxes. State governments raise revenues through a variety different taxes, including personal and corporate income taxes, sales and excise taxes, and property taxes.

6-1 Learning Objective Distinguish between average tax rates and marginal tax rates

The average tax rate is the ratio of total tax payments to total income. In contrast, the marginal tax rate is the change in tax payments induced by a change in total taxable income. Thus, the marginal tax rate applies to the last dollar that a person earns. In a progressive tax system, the marginal tax rate increases as income rises, so that the marginal tax rate exceeds the average tax rate. This contrasts with a regressive tax system, in which higher-income people pay lower marginal tax rates, resulting in a marginal tax rate that is less than the average tax rate. The marginal tax rate equals the average tax rate only under proportional taxation, in which the marginal tax rate does not vary with income.

Tax rate

The promotion of a tax base that must be paid to the gov as taxes.

Unit tax

a constant tax assessed on each unit of a good that consumers purchase

unit tax

a constant tax assessed on each unit of a good that consumers purchase

Unit tax

a constant tax assessed on each unit of a good that consumers purchase.

capital loss

a negative difference between the purchase price and the sale price for an asset

Capital loss

a negative difference between the purchase price and the sale price of an asset.

Capital gain

a positive difference between the purchase price and the sale price of an asset. If a share of stock is bought for $5 and the sold for $15, the capitol gain is $10

capital gain

a positive difference between the purchase price and the sale price of an asset. If a share of stock is bought for $5 and then sold for $15, the capital gain is $10

Capital gain

a positive difference between the purchase price and the sale price of an asset. If a share of stock is bought for $5 and then sold for $15, the capital gain is $10.

Tax bracket

a specified interval of income to which a specific and unique marginal tax rate is applied

tax bracket

a specified interval of income to which a specific and unique marginal tax rate is applied

Tax bracket

a specified interval of income to which a specific and unique marginal tax rate is applies.

Excise tax

a tax leveid on purchased of a particular good or service

excise tax

a tax levied on purchases of a particular good or service

Excise tax

a tax levied on purchases of a particular good or service.

Progressive taxation

a tax system in which as income increases, a higher percentage of the additional income is paid as taxes. The marginal tax rate exceeds the average tax rate as income rises.

regressive taxation

a tax system in which as more dollars are earned, the percentage of tax paid on them falls. The marginal tax rate as income rises

Regression taxation

a tax system in which as more dollars are earned, the percentage of tax paid on them falls. The marginal tax rate is less than the average tax rate as income rises

Regressive taxation

a tax system in which as more dollars are earned, the percentage of tax paid on them falls. The marginal tax rate is less than the average tax rate as income rises.

progressive taxation

a tax system in which, as income increase, a higher percentage of the additional in one is paid as taxes. The marginal tax rate exceeds the average tax rate as income rises

Progressive taxation

a tax system in which, as income increases, a higher percentage of the additional income is paid as taxes. The marginal tax rate exceeds the average tax rate as income rises.

proportion taxation

a tax system in which, regardless of an individual's income, the tax bill comprises exactly the same proportion

Proportional taxation

a tax system in which, regardless of an individuals income, the tax bill comprises exactly the same proportion

Proportinal taxation

a tax system in which, regardless of an individuals income, the tax bill comprises exactly the same proportion.

Ad valorem taxation

assessing taxes by changing a tax rate equal to a fraction of the market price of each unit purchased

The ______ tax rate is the total tax payment divided by total income and the _____ tax rate is the change in the tax payment divided` by the change in income.

average marginal

Marginal tax rate (formula)

change in taxes due = ------------------------------------ change in taxable income

The sales tax rate applied to all purchases within a state was 0.04 (4 percent) throughout 2012 but increased to 0.05 (5 percent) during all of 2013. The state government collected all taxes due, but its tax revenues were equal to $40 million each year. Within this state, the sales tax base from 2012 to 2013 must have ___. Which of the following could account for this change in the tax base?

declined Both A and C

Because corporations must first pay an income tax on most earnings, the personal income tax shareholders pay on dividends received (or realized capital gains) constitutes ___ taxation.

double

According to ___ tax analysis, higher tax rates cause the tax base to decrease. Tax collections will rise less than predicted by ___ tax analysis.

dynamic static

The Mayor of Stuckeyville is considering increasing the tax on bowling. He is confident that tax revenues will increase but recognizes the possibility that they may decrease. The mayor is engaging in

dynamic tax analysis.

Retained earnings

earnings that a corporation saves, or retains for investment in other productive activities; earnings that are not distributed to stockholders

retained earnings

earnings that a corporation saves, or retains, for investment in other productive activities; earnings that are not distributed to stock holders

Retained earnings

earnings that a corporation saves, or retains, for investment in other productive activities; earnings that are not distributed to stockholders.

Dynamic analysis

economic evaluation of tax rate changes that recognize that the tax base eventually declines with ever-higher tax rates so that tax revenues may eventually decline if the tax rate is raised sufficiently.

Dynamic tax analysis

economic evaluation of tax rate changes that recognizes that the tax base declined with ever-higher tax rates, so that tax revenues may eventually decline if the tax rate is raised sufficiently.

dynamic tax analysis

economic evaluation of tax rate changes that recognizes that the tax base declines with ever-higher tax rates, so that tax revenues may eventually decide if the tax rate is raised sufficiently

Statistic tax analysis

economic evaluation of the effects of tax rate changes under the assumption that there is no effect on the tax base, meaning that there is an unambiguous positive relationship between tax rates and tax revenues.

static tax analysis

economic evaluation of the effects of tax rate changes under the assumption that there is no effect on the tax base, meaning that there is unambiguous positive relationship between tax rates and tax revenues

Static tax analysis

economic evaluations of the effects of tax rate changes under the assumption that there is no effect on the tax base, meaning that there is an unambiguous positive relationship between tax rates and tax revenues.

Dynamic tax analysis indicates that there is a tax rate that maximizes the government's tax collections. Setting the tax rate any higher would cause the tax base to ___ sufficiently that the government's tax revenues will ___.

fall decline

The fact that every dollar that the government spends or transfers must ultimately be provided by the taxes and user charges it collects plus government borrowing is known as the

government budget constraint.

The imposition of a new excise tax will

increase equilibrium price and decrease equilibrium quantity.

The federal government raises most of its revenues through ___ ___ taxes and social insurance taxes and contributions. State and local governments raise most of their tax revenues from ___ taxes, ___ taxes, and income taxes.

individual income personal corporate

When a government assesses a unit excise tax, the market price of the good or service typically rises by an amount ___ than the per-unit tax. Hence, consumers pay a portion of the tax, and firms pay the remainder.

less

Suppose you are making $50,000 per year and paying $5,000 per year in income taxes. You get a $10,000 per year raise and your income taxes are now $6,500 per year. Based on this information, the income tax system is

progressive

Tax systems can be _____,_________,or ________, depending on whether the marginal tax rate is the same as, greater than, or less than the average tax rate as income rises.

proportional progressive regressive

Government collect taxes by applying a tax ____ to a tax ______, which refers to the value of goods, services, wealth, or incomes. Income tax rates are applied to tax brackets, which are ranges of income over which the tax rate is constant.

rate base

If the government wishes to maximize its tax revenue, it should

recognize that too high of a tax rate can decrease the tax base.

Imposing a tax on sales of an item ___ the equilibrium quantity produced and consumed and ___ the market price.

reduces raises

Both employers and employees must pay ___ ___ taxes and contributions at rates of 6.2 percent on roughly the first $120,000 in wage earnings, and a 2.9 percent ___ tax rate is applied to all wage earnings. The federal government and some state governments also assess taxes to pay for ___ insurance systems.

social security medicare unemployment

The ___ view of the relationship between tax rates and tax revenues implies that higher tax rates always generate increased government tax collections.

static

Assume that the government one day decides to tax greens fees at all state golf courses. To the government's dismay, not only was the amount of tax collected small, but there was a 90 percent decline in golfing. What type of tax analysis did the government apparently rely upon when it imposed this tax?

static tax analysis

sales taxes

taxes assessed on the prices paid on most goods and services

Sales tax

taxes assessed on the prices paid on most goods or services

marginal tax rate

the change in the payment divided by the change in income, or the percentage of additional dollars that must be paid in taxes. The marginal tax rate is applied to the highest tax bracket of taxable income reached

Marginal tax rate

the change in the tax payment divided by the change in income, or the percentage of additional dollars that must be paid in taxes. The marginal tax rate is applied to the highest tax bracket of taxable income reached.

Marginal tax rate

the change in the tax payment divided by the change in income, or the percentage of additional dollars that must be paid in taxes. the marginal tax rate is applied to the highest tax bracket of taxable income reached

Tax incidence

the distribution of tax burdens among various groups in society

tax incident

the distribution of tax burdens among various groups in society

Tax incidence

the distribution of tax burdens among various groups in society.

The marginal income tax rate applies to

the income in the highest tax bracket reached.

The marginal tax rate is

the increase in taxes as a percentage of the increase in income.

Government budget constraint

the limit on government spending and transfers imposed by the fact that every dollar the gov spends, transfers, or uses to repay borrowed funds must ultimately be provided by the user charges and taxes it collects.

government budget constraint

the limit on government spending and trasefers imposed by the fact that every dollar the government spends, transfers, or uses to repay borrowed funds must ultimately be provided by the user charges and taxes it collects

In a progressive tax system,

the marginal tax rate and the average tax rate increase as income levels increase and the marginal tax rate exceeds the average tax rate.

Tax rate

the proportion of a tax base that must be paid to a government as taxes

tax rate

the proportion of a tax base that must be paid to the gov as taxes

average tax rate

the total payment divided by total income. It is the proportion of total income paid in taxes

Average tax rate

the total tax payment divided by total income. It is the proportion of total income paid in taxes.

Average tax rate

the total tax payment divided by total income. it is the proportion of total income paid in taxes.

The tax base is

the value of all goods, services, incomes, or wealth subject to taxation.

tax base

the value of goods, services, wealth or income subject to taxation

Tax base

the value of goods, services, wealth, or income subject to taxation.

Tax base

the value of goods, services, wealth, or incomes subject to taxiation

Average tax rate (formula)

total taxes due = ------------------------------------ total taxable income

When the government levies a tax on sales of a particular product, firms must receive a higher price to continue supplying the same quantity as before, so the supply curve shifts ___ ___ . If the tax is a unit excise tax, the supply curve shifts ___ ___ by the amount of the tax.

vertically upward vertically upward

6-4 Learning Objective Explain how the taxes govs levy on purchases of goods and services affect market prices and equilibrium quantities

when a gov imposes a per-unit tax on a good or service, a seller is willing to supply any given quantity only if the seller receives a price that is higher by exactly the amount of the tax. Hence, the supply curve shifts vertically by the amount of the tax per unit. In a market with typically shaped demand and supply curves, this results in a fall in the equilibrium quantity and an increase in the market price. To the extent that the market price rises, consumers pay a portion of the tax on each unit they buy. Sellers pay the remainder in lower profits.