CH. 6

Social Security rates today are imposed on earnings up to roughly ___?

$120,000

retained earnings definition?

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

why is the social security tax a regressive tax?

- Higher income workers pay taxes on a smaller percentage of their income. Social security taxes are regressive since they are not applied to income beyond a certain amount - *no Social Security tax after $126,000 in income - 2017. Marginal tax rate < Average tax rate Income $100,000 $200,000 Tax Rate 10% 5% Taxes $10,000 $10,000

tax incidence definition?

- The distribution of tax burdens among various groups in society

marginal tax rate?

- The marginal tax rate shows the extra tax due on an extra dollar of income. It is the income in the highest tax bracket reached. - The increase in taxes as a percentage of the increase in income. - The change in the tax payment divided by the change in income

what're the three sources of government funding?

1. Fees for government services, or user charges 2. taxes 3. borrowing

whatre the three forms of taxation systems?

1. proportional 2. progressive 3. regressive

whatre the 2 approaches to evaluating how changes in tax rates affect government tax collections?

1. static tax analysis 2. dynamic tax analysis

corporate tax income accounts for what percentage of federal tax revenue? state?

13.5%; 2% - Corporations are generally taxed on the difference between total revenues and expenses.

Homer earns $10,000 per year. Each year he spends $5,000 and saves $5,000. He pays a 5 percent sales tax on all of his spending. Assuming the sales tax is the only tax he pays, his average tax rate out of his income is?

2.5%

who pays the tax in gasoline?

3/4 consumer 1/4 corporation

Suppose the income tax rate is 0 percent on the first $10,000; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on all income above $70,000. Family A has income of $100,000 while Family B has income of $40,000. The marginal tax rates faced by the two families are?

40 percent on A and 20 percent on B.

what percent of the top earners in the US pay more than. 90%of all income taxes collected?

40%

the federal personal income tax accounts for what percent of all federal revenue?

45%

contributions to social security tax tax employers and employees is both ____?

6.2%

unit tax definition?

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

example of progressive taxation?

A family that earns $20,000 pays $1,000 in income taxes, while a family that earns $40,000 pays $3,750 in income taxes. In this situation, the income tax system is progressive. Income $0-$10,000 $10,001-$20,000 $20,001-$30,000 Tax Rate Taxes 5% 10% 30% $500 $1,000 $3,000

example of regressive taxation?

A family that earns $20,000 pays $2,000 in income taxes, while a family that earns $40,000 pays $3,000 in income taxes. In this situation, the income tax system is regressive.

tax bracket definition?

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

excise tax definition?

A tax levied on purchases of a particular good or service

dynamic tax analysis?

Economic evaluation of tax rate changes that recognizes 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. - An increase in a tax rate may lead to a decrease in the tax base.

example of proportional taxation?

James earns $160,000 per year and Josephine earns $80,000 per year. If James pays $16,000 in income taxes, and Josephine pays $8,000 in income taxes, the income tax system would be proportional.

who really pays the corporate income tax?

Tax incidence is distributed among: - consumers - stockholders - employees

sales tax definition?

Taxes assessed on the prices paid on a large set of goods and services.

what is the equation for marginal tax rate?

The change in the tax payment divided by the change in income

A government is thinking about increasing the sales tax rate. Should it use static or dynamic tax analysis? Explain why one approach is better than the other?

The government should use dynamic tax analysis. When estimating the expected revenue generated by the sales tax, it is important to remember that the tax base could be influenced. If the tax base decreases sufficiently in response to a tax-rate increase, total revenues may be reduced even though there has been an increase in the sales tax rate.

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 charges and taxes it collects.

capital loss definition?

The negative difference between the purchase price and the sale price of an asset

tax rate definition?

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

what is the rate of tax on unemployment insurance?

The rate is 0.6 percent on the first $7,000 of wages for an employee earning more than $1,500. - States may levy an additional tax up to 3 percent, based on the record of the employer.

average tax rate definition?

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

tax base definition?

The value of goods, services, wealth, or incomes subject to taxation

capital gain definition?

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

to collect tax, the government typically establishes what?

a tax base

after a government establishes a tax base, it assess what?

a tax rate

regressive taxation definition?

a tax system in which as more dollars are earned, the percentage of tax paid on them falls. the marginal tax Arte is less than the average tax rate as income rises. - In this type of tax system, as more dollars are earned, the percentage of tax paid on them falls. - A smaller percentage of income is taken in taxes as income increases. - Example: Social Security tax

progressive taxation definition?

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 - In this type of tax system, as income increases, a higher percentage of the additional income is paid as taxes (progressive tax system maximizes government revenues). - Example: Federal income tax code of the United States

proportional tax system definition?

a tax system in which, regardless of an individual's income, the tax bill comprises exactly the same proportion - Taxpayers at all income levels pay the same percentage of their income in taxes, e.g. ad valorem sales tax (a fixed percentage of a good's unit price).

Ad valorem taxation?

assessing taxes by charging a tax Arte equal to a fraction of the market price of each unit purchased. e.g. a tax on luxury items, or State sales taxes.

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 an unambiguous positive relationship between tax rates and tax revenues - the assumption that An increase in a tax rate will leave the tax base unchanged.

unemployment insurance taxes are paid by who?

employers

proportional taxation is the marginal tax ___________ the average tax?

equals Income $10,000 $100,000 Tax Rate 20% 20% Taxes $2,000 $20,000

ToF: Only in a progressive tax system does the amount of taxes increase as income increases?

false - In all of the three tax systems (progressive, regressive and proportional), the amount of taxes can increase as income increases. - In a progressive system, however, not only the amount of taxes increases but also the percentage income paid in taxes increases as income increases.

double taxation definition?

feature of taxation that allows stockholders' dividends to be taxed both as corporate profit and as personal income

in progressive taxation, marginal tax rate ___________ your average tax rate?

greater than

A friend tells you he is studying the incidence of the corporate income tax. What is the subject of his study?

how the burden of corporate taxation is distributed among stockholders, employees, and consumers

rates paid of income tax ______ as income increases?

increase

Using the fiscal year 2017 estimates, the largest component of federal revenue is the?

individual income tax.

for the federal government, what are their key taxes?

individual income taxes, corporate income taxes, social security taxes, and excise taxes

in regressive taxation, marginal taxation _________ average taxation?

lesser than

Social Security contributions are?

mandatory taxes partially paid out of workers' wages and salaries.

for state and local governments, Taxes imposed on goods and services yield ________ than income taxes?

more - A fundamental issue is how to set tax rates to extract the largest possible payments.

the us income tax system is what?

progressive

A local government currently has a tax base of $4 million and a tax rate of 5 percent. If the tax rate is increased to 6 percent, the tax base will decrease to $3.5 million. If the goal is to maximize tax revenues the tax rate should be?

raised to 6 percent.

social security tax is an example of what kind of taxation?

regressive taxation

for the state government, what are their key taxes?

sales taxes, property taxes, and personal and corporate income taxes

Imposing a tax on sales of a product?

shifts the market supply curve for the product.

Dynamic tax analysis predicts what?

that ever-higher tax rates bring about declines in the tax base.

Dynamic tax analysis generally predicts?

that the higher tax rates lead to higher revenues only to a point at which revenues will begin to decrease due to a diminishing tax base.

what do excise taxes do to gasoline?

• Excise taxes on gasoline become added costs of production. • This shifts the supply curve up by the amount of the unit tax. • Consequently, the equilibrium price of gasoline rises, and the equilibrium quantity declines.