Econ Chapter 12

What does income security programs include?

- Building and maintenance of roads and highways

What does health programs include?

- Medicare (for the elderly) - Medicaid (for the poor) - Medical research

What does national defense include?

- Salaries of military personnel - Purchases of military equipment

What does income security include?

- Social security income of elderly and disabled - Unemployment insurance payments - Welfare payments to the poor

What are 2 main costs of taxes?

1. Deadweight loss 2. Administrative burdens taxpayers bear

What are the 5 largest sources of state/local government spending?

1. Education 2. Health 3. Public order and safety 4. Income security programs 5. Interest on state/local gov debt

What are the 2 main objectives of a tax system?

1. Equity 2. Efficiency

What are 2 administrative burdens of taxes?

1. Filling out the tax forms in April 2. Keeping records for tax purposes all year

What are the 4 largest sources of federal government spending?

1. Income Security 2. Health programs 3. National defense 4. Net interest

What in order are the 3 largest sources of federal gov revenue?

1. Individual Income Tax 2. Payroll Tax 3. Corporate Income Tax

What are the 3 systems of vertical equity?

1. Proportional tax 2. Regressive tax 3. Progressive tax

What happens if taxes are based on ability to pay? (2)

1. Richer taxpayers should pay more than poorer taxpayers 2. Then similar taxpayers should pay similar amounts of taxes

Proportional Tax

A tax for which high-income and low-income taxpayers pay the same fraction of income

Progressive Tax

A tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers

Regressive Tax

A tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers

Lump-Sum Tax

A tax that is the same amount for every person

Budget Surplus

An excess of government receipts over government spending

Budget deficit

An excess of government spending over government receipts

Why are loopholes allowed?

Because Congress gives special treatment to specific types of behavior

How does the government finance a budget deficit?

Borrowing from the public by selling government debt to the private sector

How could the administrative burden be reduced?

By simplifying the tax laws

What is the federal government's third largest source of revenue?

Corporate income tax

How can you determine if a tax is horizontally equitable?

Determine which differences are relevant for a family's ability to pay and which differences are not

What is the largest spending of state/local gov?

Education

What theory is tax equity based on? Says what?

Flypaper theory of tax incidence The burden of a tax sticks wherever it first lands

What is one tax that is justified using the benefits principle?

Gasoline tax

What is the second largest spending of state/local gov?

Health programs

What does net interest mean?

How much the government owes back to the public

What does the marginal tax rate show? Why?

How much the tax system distorts incentives Measures how much the tax system discourages people from working

What is the fourth largest spending of state/local gov?

Income security programs

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

Individual income tax

What are 2 other taxes that are levied by state/local gov?

Individual income tax and corporate income tax

What is a deadweight loss in taxes?

Inefficiency that a tax creates a people allocate the goods and services that they buy and sell

What is the fifth largest spending of state/local gov?

Intrest on state/local government debt

What is the most efficient tax? Why?

Lump-sum tax Does not distort incentives and does not cause DWL

What is the federal government's second largest source of revenue?

Payroll tax

How are property taxes levied?

Percentage of estimated value of land and structures paid by property owners

How are sales taxes levied?

Percentage of total amount spent at retail stores

What does public order and safety include?

Police, firefighters, courts, and prisons

What is the third largest spending of state/local gov?

Public order and safety

What does the average tax rate show? Why?

Sacrifice made by the taxpayer Measures fraction of income paid in taxes

What are the 2 most important taxes for state/local governments?

Sales tax and property tax

What evaluates tax equity?

Tax incidence

What is corporate income tax?

Tax on corporation (business with own legal existence separate from its owners) by government based on its profit minus costs of producing goods and services

What is a payroll tax? Another name for it?

Tax on the wages a firm pays its workers Social insurance tax (earmarked to pay for Social Security and Medicare)

Marginal Tax Rate

The amount that taxes increase from an additional dollar of income

Benefits Principle

The idea that people should pay taxes based on the benefits they receive from gov services

Ability-to-pay Principle

The idea that taxes should be levied on a person according to how well that person can shoulder the burden

Vertical Equity

The idea that taxpayers with a greater ability to pay taxes should pay larger amounts

Horizontal Equity

The idea that taxpayers with similar abilities to pay taxes should pay the same amount

What determines the DWL of an income tax?

The marginal tax rate

What is the goal of a tax system?

To raise revenue for the government

How is a family's tax income found?

Total income - number of dependents - certain deductible payments

Average Tax Rate

Total taxes paid divided by total income

How does the government finance a budget surplus?

Uses excess receipts to reduce outstanding debts

What results in DWL?

When total surplus has fallen by more than the tax revenue