Chapter 18: Public Choice, Taxes, and the Distribution of Income

Progressive tax

A tax for which people with lower incomes pay a lower percentage of their income in tax than do people with higher incomes

Proportional tax

A tax in which people with lower incomes pay the same percentage of their income in tax as do people with higher incomes

Why are policymaker willing to go along with rent-seeking?

They need funds to finance their political campaigns

Average tax rate

Total tax paid divided by total income

What is the relationship between taxation and elasticity?

When the demand for a product is less elastic than the supply, consumers pay the majority of the tax on the product. When demand for a product is more elastic than the supply, firms pay the majority of the tax on the product

What is regulatory capture?

When the industry being regulated captures the agency trying to regulate it

in the ability to pay principle, what should the government attempt to achieve?

Vertical equity

What are personal exemptions?

Very basic living expenses

What is the contrast between voting market and market for goods and services?

Voters are obliged to go with any decision made on spending whereas in a good and services market they are under no obligation to spend to money to buy an iPad or not buy one

What is another name for Social Security and Medicare?

Payroll taxes

What does the US gov sometimes establish in order to intervene in the economy?

A regulatory agency or commission

Lorenz curve

A curve that shows the distribution of income by arraying incomes from lowest to highest on the horizontal axis and indicating the cumulative fraction of income earned by each fraction of households on the vertical axis

Poverty line

A level of annual income equal to three times the amount of money necessary to purchase the minimum quantity of food required for adequate nutrition

What can logrolling result in?

A majority of Congress supporting legislation that benefits the economic interests of a few while harming the economic interests of a much larger group

Arrow impossibility theorem

A mathematical theorem that holds that no system of voting can be devised that will consistently represent the underlying preferences of voters

Excess burden

A measure of the efficiency loss to the economy that results form a tax having reduced the quantity of a good produced; also known as deadweight loss

Public choice model

A model that applies economic analysis to government decision making

Rent seeking

Attempts by individuals and firms to use government action to make themselves better off at the expense of others

What has the high US corporate tax rate led many large US firms to?

Avoid returning profits earned in those countries earned in those countries back to the US

Why are firms willing to spend money to influence US policymakers?

They can benefit from government in the US economy

How is a tax efficient?

It imposes a small excess burden relative to the tax revenue it raises

When a tax is progressive, the marginal and average tax rates?

Differ

What are the things taxpayers can use to reduce the amount of income subject to taxation?

Exemptions and deductions

What taxes are compatible with ability to pay? Which are not?

Federal income; sales

What factors does the US take into account when evaluating which taxes to use?

Goal of economic efficiency, ability to pay principle, horizontal equity principle, benefits received principle, goal of attaining social objectives

Ability to pay principle

Holds that when the government raises revenue through taxes it is fair to expect a greater share of the tax burden to be borne by people who have a greater ability to pay

What is the difference between individual income tax and corporate income tax?

In individual, relatively few taxpayers are taxed at the highest rate, but in corporate many are in the 35% bracket

How does rent-seeking compare to the market system?

In the market system, though firms are looking to make a profit off of the sales of the good, it also benefits the millions of consumers who gain utility from using the product. In rent-seeking, often people have some form of reduced economic efficiency (sugar quota hurts US candy companies)

What is the largest source of revenue for the federal government?

Income taxes

Why have several countries cut corporate income taxes?

Increase investment spending and growth

What are the five most used taxes?

Individual income, social insurance, sales, property and excise

What is the voting paradox?

It would make sense that politicians simply represent the views of the voters who elected them but sometimes the majority voting will fail to result in a consistent decision

What are two other factors that explain why rent-seeking often succeeds?

Logrolling and rational ignorance

What is one answer to the question of why incomes differ?

Marginal productivity theory of income distribution

What is a better indicator of how a tax will affect people's willing to work, save, and invest?

Marginal tax rate

In recent years, how much of al households have paid no federal income tax?

Nearly half

What is medicare?

Payments to medical expenses of people over 65

What is social security?

Payments to retired workers and disabled individuals

Tax rate

Percentage of income paid in taxes

Why are policymakers and households very similar?

Policymakers are likely to pursue their own self-interest even if it conflicts with the public interest... specifically in being reelected

What kind of tax is the corporate income tax?

Progressive

What is the largest source of funds for public schools?

Property taxes

Logrolling

Situation where a member of Congress votes to approve a bill in exchange for favorable votes from other members on other bills

Where does more than 75% of US revenue come from?

Social insurance and individual income taxes

What do policy-makers introduce for campaign contributions?

Special-interest legislation

Horizontal equity principle

States that people in the same economic system should be treated equally

Benefits received principle

States that people who receive the benefits from a government program should pay the taxes that support the program

Regressive tax

Tax for which people with lower incomes pay a higher percentage of their income in tax than do people with higher incomes

What is property tax?

Tax from local government on homes, offices, factories, and land that things are built on

What is an example of a tax with a high deadweight loss? Why?

Tax on interest earned from savings; savings often comes from income already taxed once (double taxation)

What is sales tax?

Tax on retail sales of most products (sometimes food and clothing are exempt)

What is excise taxes?

Tax on specific goods like gasoline, cigarettes, and beer

What is an individual income tax?

Tax on the wages and incomes of households and small businesses

What are social insurance taxes?

Tax on the wages and salaries to raise revenue for the Social Security and Medicare systems

How much tax revenue does the US government collect?

Tax per unit multiplied by the number of units sold

What does the government primarily rely on to raise the revenue it needs?

Taxes

What are sin taxes?

Taxes intended to discourage certain activities

What is the goal of attaining social objectives?

Taxes to attain objectives; discourage alcohol and smoking

Human capital

The accumulated knowledge and skills that workers acquire from formal training and education or from life experiences

Tax incidence

The actual division of the burden of a tax between buyers and sellers in a market

What does being rationally ignorant?

The effects of logrolling and rent-seeking can be so minimal that voters lack an economic incentive to become informed about legislation and and do influence voting habits

Voting paradox

The failure of majority voting got always result in consistent choices

What is an example of a progressive tax?

The federal income tax

Marginal tax rate

The fraction of each additional dollar of income that must be paid in taxes

How do economists believe they should improve the economic efficiency of the tax system?

The government should reduce its reliance on taxes that have a high deadweight loss relative to the revenue raised

Tax bracket

The income range within which a tax rate applies

The higher the marginal tax rate...

The lower the return a person receives from working additional hours (and thus is less likely to work them)

Poverty rate

The percentage of the population that is poor according to the federal government's definition

What is one implication of the median voter theorem?

The political process tends to serve individuals whose preferences are in the middle but not those individuals whose preferences are far away from the median

Median voter theorem

The proposition that the outcome of a majority vote is likely to represent the preferences of the voter who is in the political middle

How does the voting market compare with the market for goods and services?

The voting market may often do a less efficient job of representing consumer preferences than do markets for goods and services