econ chapter 6 and 19

sales taxes

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

tax base

which is the value of goods, services, wealth, or incomes subject to taxation

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

distinguish between average tax rates and marginal tax rate

6.1 Distinguish between average tax rates and marginal tax rates The average tax rate is the ratio of total tax payments to total income. The marginal tax rate is the change in tax payments induced by a change in total taxable income and thereby 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. In a regressive tax system, the marginal tax rate decreases as income rises, so that the marginal tax rate 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.

6.2 Explain the structure of the U.S. income tax system

6.2 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 of different taxes, including personal and corporate income taxes, sales and excise taxes, and property taxes.

unit tax

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

elastic demand

A demand relationship in which a given percentage change in price will result in a larger percentage change in quantity demanded.

unit elasticity of demand

A demand relationship in which the quantity demanded changes exactly in proportion to the change in price.

Perfectly inelastic demand

A demand that exhibits zero responsiveness to price changes. No matter what the price is, the quantity demanded remains the same.

Perfectly elastic demand

A demand that has the characteristic that even the slightest increase in price will lead to zero quantity demanded.

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

Perfectly inelastic supply

A supply for which quantity supplied remains constant, no matter what happens to price.

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

Proportional taxation

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

ad valorem taxation

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

19.4 Explain the cross price elasticity of demand and the income elasticity of demand

Cross price elasticity of demand is the percentage change in the amount demanded divided by the percentage change in the price of a related item, and income elasticity is the percentage change in the amount demanded divided by the percentage change in income.

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.

6.3 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 government's tax revenues. If the government 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 charges and taxes it collects.

Income elasticity of demand (Ei)

The percentage change in the amount of a good demanded, holding its price constant, divided by the percentage change in income. The responsiveness of the amount of a good demanded to a change in income, holding the good's relative price constant.

Cross price elasticity of demand (Exy)

The percentage change in the amount of an item demanded (holding its price constant) divided by the percentage change in the price of a related good.

19.1 Calculate price elasticity of demand

The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. The percentage change in quantity demanded is equal to the change in the quantity resulting from a price change divided by the average of the initial and final quantities, and the percentage change in price is equal to the price change divided by the average of the initial and final prices. Over the elastic range of a demand curve, the price elasticity of demand exceeds 1, and an increase in price reduces total revenues. Over the inelastic range of a demand curve, the price elasticity of demand is less than 1, and an increase in price raises total revenues. Finally, over the unit-elastic range of a demand curve, the price elasticity of demand equals 1; an increase in price does not affect total revenues.

Classify supply elasticities and explain how the length of time for adjustment affects the price elasticity of supply

The price elasticity of supply equals the percentage change in quantity supplied divided by the percentage change in price. If the price elasticity of supply exceeds 1, supply is elastic, and if the price elasticity of supply is less than 1, supply is inelastic. Supply is unit-elastic if the price elasticity of supply equals 1. Supply is more likely to be elastic when sellers have more time to adjust to price changes.

assesses a tax rate

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

price elasticity of demand

The responsiveness of the quantity demanded of a commodity to changes in its price; defined as the percentage change in quantity demanded divided by the percentage change in price.

Price elasticity of supply (Es)

The responsiveness of the quantity supplied of a commodity to a change in its price—the percentage change in quantity supplied divided by the percentage change in price.

Average tax rate

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

19.2 Explain the relationship between price elasticity of demand and total revenues

Total revenues equal the price multiplied by the number of units purchased. Along a demand curve, price and quantity changes move in opposite directions, so the effect of a price change on total revenues depends on the responsiveness of quantity demanded to a price change. If demand is elastic, a price increase reduces total revenues, but if demand is inelastic, a price increase raises total revenues. If demand is unit-elastic, a price increase leaves total revenues unchanged.

6.4 Explain how the taxes governments levy on purchases of goods and services affect market prices and equilibrium quantities

When a government 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.

Inelastic demand

demand relationship in which a given percentage change in price will result in a less-than-proportionate percentage change in the quantity demanded.

19.3 Describe the factors that determine the price elasticity of demand Price

elasticity of demand is greater with more close substitutes, when a larger portion of a person's budget is spent on the good, or if there is more time to adjust to a price change.

excise taxes

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