Chapter 6

Sales taxes

Taxes assessed on the prices paid on most goods and services.

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.

There are two approaches to evaluating how changes in tax rates affect government tax collections.

1. Static tax analysis 2. Dynamic Tax Analysis

There are three sources of funding available to governments.

1. explicit fees, called user charges, for government services. 2. main source of government funding is taxes. 3. borrowing

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 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 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.

Excise tax

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

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. As income increases, the marginal tax rate falls, and so does the average tax rate. The U.S. Social Security tax is regressive.

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. In a progressive system, the marginal tax rate is above the average tax rate. Your marginal tax rate is always above your average tax rate.

Proportional taxation

A tax system in which, regardless of an individual's income, the tax bill comprises exactly the same proportion. In a proportional taxation system, the marginal tax rate is always equal to the average tax rate.

The most important tax in the U.S. economy is the A. personal income​ tax, which accounts for 49 percent of all federal revenues. B. corporate income​ tax, which accounts for 49 percent of all federal revenues. C. corporate income​ tax, which accounts for 62 percent of all federal revenues. D. personal income​ tax, which accounts for 85 percent of all federal revenues.

A. personal income​ tax, which accounts for 49 percent of all federal revenues.

Ad valorem taxation

Assessing taxes by charging a tax rate equal to a fraction of the market price of each unit purchased.

The federal personal income tax accounts for roughly​ ________ of all federal revenues. A. 6 percent B. 46 percent C. 32 percent D. 92 percent

B. 46 percent

The most important tax in the U.S. economy is the federal personal income tax. A. False B. True

B. True

The corporate income tax in the United States A. does not apply to profits earned on exports. B. results in​ individuals' being doubly taxed on corporate earnings. C. excludes dividends paid out. D. only taxes retained earnings.

B. results in​ individuals' being doubly taxed on corporate earnings. Because individual stockholders must pay taxes on the dividends they​ receive, which are paid out of after-tax profits by the​ corporation, corporate profits are taxed twice.

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

C. The consumer pays the majority of the tax but not the entire tax. Since consumers pay 40 cents​ more, and the tax is 60​ cents, consumers pay the majority of the tax.

The​ "incidence of a​ tax" A. is a special tax on individuals with high income. B. is a tax paid by​ self-employed workers. C. refers to those who bear the final burden of taxation. D. is a benefit tax.

C. refers to those who bear the final burden of taxation. The​ "incidence of a​ tax" refers to those who bear the final burden of taxation.

Some economists argue that corporate income taxes are typically not paid by the​ firm, but by A. bondholders. B. the​ firm's board of directors. C. the​ stockholders, employees, and customers. D. the government.

C. the​ stockholders, employees, and customers. The incidence of corporate taxation is the subject of considerable debate. Some economists suggest that corporations pass their tax burdens on to consumers by charging higher prices. Other economists argue that it is the stockholders who bear most of the tax. Still others contend that employees pay at least part of the tax by receiving lower wages than they would otherwise.

Suppose that a state government implements a tax on​ mechanics' labor time at all state auto repair shops in order to enhance its tax revenues. One year later the government is disappointed to find that not only is the amount of tax collected​ small, but that​ in-state auto repair work significantly declined. This state government apparently utilized which type of tax​ analysis? A. Linear projection tax analysis. B. Dynamic tax analysis. C. Speculative tax analysis. D. Static tax analysis.

D. Static tax analysis. Static tax analysis evaluates the effects of tax rate changes under the assumption that the changes will not impact the tax base.

Retained earnings

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

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 decline if the tax rate is raised sufficiently.

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.

For the federal government, key taxes are:

Individual income taxes, corporate income taxes, Social Security taxes, and excise taxes on items such as gasoline and alcoholic beverages.

Marginal tax rate, with the word marginal meaning "incremental."

Marginal tax rate = change in taxes due / change in taxable income

For state and local governments, , key taxes are:

Sales taxes, property taxes, and personal and corporate income taxes.

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.

Tax rate

The proportion of a tax base that must be paid to a government as 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 = total taxes due / total taxable income

Tax base

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

To determine whether a tax system is proportional, progressive, or regressive, we simply ask, what is the relationship between the ___ ___ ___ and the ___ ___ ___?

average tax rate; marginal tax rate

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

Dynamic tax analysis recognizes that increasing the tax rate could actually cause the government's total tax collections to ___ if a sufficiently large number of consumers react to the higher sales tax rate by cutting back on purchases of goods and services included in the state's tax base.

decline

The sales tax rate applied to all purchases within a state was 0.04​ (4 percent) throughout 2016 but increased to 0.05 ​(5 percent​) during all of 2017. 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 2016 to 2017 must have ___. Which of the following could account for this change in the tax​ base? A. A weaker state economy. B. Rapid economic growth. C. People avoiding the purchase of taxable items. D. All of the above. E. Both A and C.

declined; E. Both A and C.

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

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

Corporate income taxes account for 11.5 percent of all ___ taxes collected. They also make up about 2 percent of all ___ and ___ taxes collected.

federal; state and local. Corporations are generally taxed on the difference between their total revenues and their expenses.

Consumers will pay most of an excise tax levied on a product when they have a relatively ___ responsiveness of quantity demanded to a change in the price of the good.

low; Consumers will pay most of an excise tax levied on a product when they have a relatively low responsiveness of quantity demanded to a change in the price of the good.

The most important tax in the U.S. economy is the federal ___ ___ ___.

personal income tax

All taxes fit into one of three types of taxation systems:

proportional, progressive, or regressive, according to the relationship between the tax rate and in come.

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, respectively.

proportional; progressive; regressive

Governments collect taxes by applying a tax ___ to a tax ___​, which refers to the value of​ goods, services,​ wealth, or incomes.

rate; base

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

static

The Tax Reform Act of 1986 reduced the number to ___ tax brackets from ___ separate tax brackets.

three; fourteen There are now seven tax brackets.