Chapter 15: Taxes - Efficiency and Fairness

Sales tax

A tax on a most goods and services purchased.

Personal income tax

A tax on income an individual or family receives.

In which of the following situations would the idea of vertical equity be violated? A. Calvin earns $20,000 per year and pays $2,000 in taxes. Martin earns $200,000 a year and pays $20,000 in taxes. B. Martha earns $50,000 a year and receives work benefits equal to $25,000 a year. She pays $22,500 in taxes. Earl earns $25,000 in wages and receives benefits worth $20,000 a year. He pays $13,500 in taxes. C. Ali earns $7,000 in wages and $1,000 in benefits per month. He pays $1,750 in taxes each month. Sasha earns $5,000 in wages and $3,000 in benefits per month. She pays $1,250 each month in taxes. D. Marcus earns $50,000 in income and $20,000 worth of benefits each year. He pays $15,000 in taxes each year. Claudia earns $60,000 running her own business. She receives no additional non-monetary benefits. She pays $18,000 in taxes each year.

Marcus earns $50,000 in income and $20,000 worth of benefits each year. He pays $15,000 in taxes each year. Claudia earns $60,000 running her own business. She receives no additional non-monetary benefits. She pays $18,000 in taxes each year.

Flat tax

Marginal rates are the same at all levels of income. Often exemptions and standard deductions are proposed at low levels of income.

Vertical equity

People who earn more should pay at least as much as those who earn less.

Horizontal equity

People who have equal incomes should pay the same taxes.

A flax tax is a form of what tax?

Proportional

What is the number where social security taxes apply only to an individual's income up to what?

$127,200 a year

The ___% is for hospital insurance. (Medicare)

1.45

The _____% is for traditional Social security.

6.2

In 2017, a person in the U.S. who earns $25,000 pays a marginal tax rate of ______________% into the Social Security Program, while a person who earns $135,000 pays a marginal tax rate of ______________% into the Social Security Program. A. 6.2, 6.2 B. 0, 6.2 C. 6.2, 0 D. 0, 0

6.2, 0

If an individual is earning less than $127,200 they will pay __% of his or her income in social security and medicare tax.

7.65

Deadweight loss

A measure of the inefficiency created by a tax.

Transfer payment

A payment or grant from a government to an individual.

Which of the following taxes is progressive? A. A 15% value-added tax on all stages of production B. A tax of 20% on the first $100,000 of income and 30% on any additional income C. A tax of 30% on the first $100,000 of income and 20% on any additional income D. A tax of 25% on all forms of consumption

A tax of 20% on the first $100,000 of income and 30% on any additional income The increase in marginal rate as income rises will increase the average tax rate. Together, they create a progressive tax.

Which of the following taxes is regressive? A. A tax of 25% on the first $100,000 of income and of 20% on any additional income B. A tax of 15% on capital gains and interest income C. A tax of 50% on inheritance income D. A tax of 20% on the first $100,000 of income and 30% on any additional income

A tax of 25% on the first $100,000 of income and of 20% on any additional income The decrease in marginal rate at higher levels of income creates a regressive tax.

Excise tax

A tax on specific goods and services.

Capital gains taxes

A tax on the increase in the value of a financial or real asset. Stocks and bonds are good examples. If an asset is sold, the difference between the purchase price and the sale price is the capital gain and is taxed.

Property tax

A tax on the value of property (usually real estate) owned by businesses and individuals.

Which of the following taxes is proportional? A. An equal sales tax on all items except groceries B. An equal sales tax on all purchases savings accounts C. An equal tax on all wages D. An equal tax on all inheritances

An equal sales tax on all purchases savings accounts By taxing consumption and savings, all income is being taxed at the same rate.

Sales taxes are which of the following? A. An important source of revenue for state and local governments but not very important for the federal government in the U.S. B. An important source of revenue for the federal government but not very important for state and local governments in the U.S. C. An important source of revenue for the federal government and state and local governments in the U.S. D. Not very important for the federal government nor state and local governments in the U.S.

An important source of revenue for state and local governments but not very important for the federal government in the U.S.

If a state builds a new road and establishes toll booths to charge the people who drive on the road, it would be clear that the people who use the new road are the people who are helping fund the road. What example is this?

Benefit Principle

What happens to the Dead weight Loss when a product becomes more elastic in Demand and Supply?

DWL Rises

What happens to the DWL when a product is inelastic or Less elastic when in demand/supply?

DWL falls

Two facets of taxes that economists often use to compare taxes are _________. A. Efficiency and revenue generation B. Efficiency and fairness C. Fairness and trade impact D. Revenue generation and trade impact

Efficiency and fairness

T/F: Adam Smith opposed government taxation and spending.

False

Personal income taxes dominate what kind of tax collection?

Federal

Economists have estimated the elasticity of demand for the following (fairly) common goods: If the same excise tax were imposed on the sale of each item, which market would experience the largest deadweight loss? Good: Ed 1. Coffee 0.25 2. Fresh Tomatoes 4.60 3. Oysters 1.10 4. Toothpicks 0.10

Fresh Tomatoes Fresh tomatoes have the largest elasticity of demand of the four items listed. Therefore, the change in quantity demanded would be the largest in that market if the same excise tax were to be imposed in all four markets.

As the elasticity of demand increases, all other things being equal, the impact of a tax on equilibrium quantity does which of the following? A. Gets larger B. Gets smaller C. Is unchanged D. Is the same as the change in price

Gets smaller

Essay question: What will happen to prices and quantities if a tax is placed on a good with an elastic supply? An inelastic supply?

If a good was taxed and placed with an elastic supply then the price would be small and the fall in output would be large. If a good was taxed and placed with a inelastic supply then the price would increase and the quantity would be smaller.

Example of Progressive tax

Income Tax

A criticism of the current Social Security program (in the U.S.) that focuses on its equity implications is that it is which of the following? A. Is funded by a regressive tax B. Is funded by a progressive tax C. Distorts individual savings behavior D. Distorts individual consumption behavior

Is funded by a regressive tax It is a regressive tax because it phases out after a certain income is reached.

Which of the following would increase the efficiency loss of a progressive income tax? A. Labor supply gets more elastic as income rises B. Labor supply gets less elastic as income rises C. Higher income workers get more services from the government D. Lower income workers get more services from the government

Labor supply gets more elastic as income rises Explanation If labor supply gets more elastic as income rises, the deadweight loss of a tax on income will grow.

Vertical equity considers how individuals in different economic situations are treated by the tax code. The three different ways the tax code could treat individuals is:

Proportionately, progressively, regressively

What are the three main rules for governments to tax people?

Protect society from invasions Protect citizens from injustices Produce and maintain public institutions & public works.

If the amount of tax is smaller percentage of income as income increases it is_________

Regressive

What is the formula for Dead weight loss? (DWL)

Tax x Change in quantity / 2

What is the formula for revenue for a government?

Tax x New quanity

Payroll tax

Taxes calculated as a percent of an employee's wage paid by the employer.

Other governments rely more heavily on taxes on what two things to generate revenue?

Taxes on goods and services.

What dominates revenue in the United States?

Taxes on income, profits and capital gain dominates revenue

Regressive tax

The amount of tax paid as a percentage of income decreases as one's income increases.

Progressive tax

The amount of tax paid as a percentage of income increases as one's income increases.

Proportional tax

The amount of tax paid as a percentage of income stays the same as one's income increases.

Marginal tax rate

The change in tax paid divided by a change in income.

Marginal revenue product

The increase in revenue resulting from the hiring of one additional worker. Price of the product times the marginal product of labor equals the marginal revenue product.

Tax revenue

The money raised by imposing a tax on a market.

Ability-to-pay principle

The principle based on the idea that one should pay for government services according to one's ability. We define that ability most often as the amount of income or amount of wealth.

Benefit principle

The principle that one should pay taxes according to the benefits received from government goods and services.

Average tax rate

The total tax paid divided by the total amount of income.

Wealth

The value of assets owned minus the liabilities owed.

Flat tax proposals generally fail to be truly proportional because which of the following is true? A. The marginal rate increases as people earn more income even though the average rate stays the same B. They offer exemptions or deductions which create increasing average tax rates C. The marginal rate decreases as people earn more income even though the average rate stays the same D. They offer loopholes that create decreasing average tax rates

They offer exemptions or deductions which create increasing average tax rates With deductions or exemptions, the average rate becomes progressive.

Economists have estimated the elasticity of demand for the following (fairly) common goods: If the same excise tax were imposed on the sale of each item, which market would experience the Smallest deadweight loss? Good: Ed 1. Coffee 0.25 2. Fresh Tomatoes 4.60 3. Oysters 1.10 4. Toothpicks 0.10

Toothpicks Toothpicks have the smallest elasticity of demand of the four items listed. Therefore, the change in quantity demanded would be the smallest in that market if the same excise tax were to be imposed in all four markets.

T/F Gas is a type of regression tac.

True

What is the largest source of personal income for residents of the U.S? A. Corporate profits B. Rent C. Wages and salaries D. Proprietor's income

Wages and salaries

What are the types of Income?

Wages and salaries Benefits Corporate profits Proprietors' income Rent Interest