Chapter 9 Study Guide (Economics)

Sin Tax

A tax on items considered undesirable or harmful, such as alcohol or tobacco.

FICA

Is a U.S. law that creates a payroll tax requiring a deduction from the paychecks of employees as well as a contribution from employers to fund the Social Security and Medicare programs.

VAT

Is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.

Indexing

Is a revision of tax brackets to prevent workers from paying more taxes due to inflation.

Corporate Income Tax

Is a tax based on a corporation's profits.

Individual Income Tax

Is a tax based on an individual's income from all sources: wages, interest, dividends, and tips.

Sales Tax

Is a tax based on the value of designated goods or services at the time of sale.

Estate Tax

Is a tax on property that is transferred to others on the death of the owner.

Excise Tax

Is a tax on the production or sale of a specific product, such as gasoline or telephone service.

Ability-to-Pay

Is an economic principle that states that the amount of tax an individual pays should be dependent on the level of burden the tax will create relative to the wealth of the individual.

Progressive Tax

Places a higher percentage rate of taxation on high-income earners than on low-income earners.

What are the main types of taxes that are normally withheld from a worker's paycheck?

Income tax, city income tax, and FICA tax.

Regressive Tax

Takes a larger percentage of income from people with low incomes than from people with high incomes.

Proportional Tax

Takes the same percentage of income from all taxpayers regardless of income level.

What are the advantages and disadvantages of a VAT?

Advantages: Hard to avoid, tax incidence is widely spread, and easy to collect. Disadvantages: Invisible to consumers and competes with state sales taxes.

What is the difference between excise taxes, estate taxes and gift taxes, and customs duties?

An excise tax is the tax placed on the manufacture and sale of certain items. Estate taxes are taxes the government levies on the transfer of property when a person dies. A gift tax is paid by the person who makes the gift.

What are the two principles of taxation?`

Benefit principle taxation and ability-to-pay principle of taxation.

What are the three criteria used to evaluate taxes?

Equity, simplicity, and efficiency.

Describe the main features of the individual income tax.

If you are self-employed, you send quarterly estimates to the IRS. If not, the taxes are pre-deducted from your paycheck and the difference is paid if the estimate and the actual amount taxed do not match up.

What are the main sources of revenue for local governments?

Property taxes, sin tax, and sales tax.

How can taxes be used to affect people's behaviors?

Taxes can be placed on socially undesirable products to reduce their consumption.