Econ 201: Chapter 7

Lump-Sum Tax

A lump-sum tax is the same for everyone, regardless of any actions people take. A lump-sum tax is efficient because it does not distort incentives but is generally considered unfair.

Marginal Tax Rate

A marginal tax rate is the percentage of an increase in income that is taxed away.

Payroll Tax

A payroll tax is a tax on the earnings an employer pays to an employee.

Profits Tax

A profits tax is a tax on a firm's profits.

Progressive Tax

A progressive tax takes a larger share of the income of high-income taxpayers then of low-income taxpayers. Often justified by the ability-to-pay principle.

Property Tax

A property tax is a tax on the value of property, such as the value of a home.

Proportional Tax

A proportional tax is the same percentage of tax base regardless the taxpayer's income or wealth.

Regressive Tax

A regressive tax takes a smaller share of the income of high income taxpayers than of low income taxpayers.

Sales tax

A sale's tax is a tax on the value of goods sold.

Tax Base

A tax base is the measure or value, such as income or property value, that determines how much tax an individual or firm pays.

Tax Rate

A tax rate is the amount of tax people are required to pay per unit of whatever is being taxed.

Wealth Tax

A wealth tax is a tax on an individual's wealth.

The Ability-to-Pay Principle of Tax Fairness

According to the ability-to-pay principle of tax fairness, those with greater ability to pay a tax should pay more tax.

The Benefits Principle of Tax Fairness

According to the benefits principle of tax fairness, those who benefit from public spending should bear the burden of the tax that pays for that spending.

Excise Tax

An excise tax is a tax on sales of a good or service. The excise tax drives a wedge between price payed by consumers and that received by producers leading to a fall in the quantity transacted. It creates inefficiency by distorting incentives and creating missed opportunities. The higher the price elasticity of supply and the lower the price elasticity of demand, the heavier the burden of the excise tax is on the CONSUMERS. The lower the price elasticity of supply and the higher the price elasticity of demand, the heavier the burden on the PRODUCERS. An excise tax generates revenue equal tot he tax rate times the number of units of the good or service transacted but reduces consumer and producer surplus.

Income Tax

An income tax is a tax on an individual's or family's income.

Trade-off between Equity and Efficiency

In a well designed tax system, there is a trade-off between equity and efficiency: the system can be made more efficient only by making it less fair and vice versa. How a tax system should weight equity and efficiency is a value judgement to be decided by the political process.

Government Tax Policy

Other things equal, government tax policy aims for tax efficiency. But, it also tries to achieve tax fairness, or tax equity.

Administrative Costs

The administrative costs of a tax are the resources used by government to collect the tax, and by taxpayers to pay it, over and above the amount of the tax, as well as to evade it. The total amount of inefficiency from a tax is equal to the dead weight loss plus the administrative costs of the tax.

Incidence

The incidence of a tax is a measure of who really pays it. It does not depend on who the tax is officially levied on. Rather, it depends on the price elasticity of demand and supply.

Dead Weight Loss

The larger number of transactions prevented by a tax,, the larger the DWL. As a result, the taxes on goods with a greater price elasticity of supply or demand, or both, generate higher DWL's. There is no DWL when the number of transactions is unchanged by the tax.

Tax Structure

The tax structure specifies how the tax depends on the tax base.