Econ 102: Taxes & Tax Policy

What is the difference between a tax bracket and a tax rate?

-A tax rate is the percentage of income paid in taxes. -A tax bracket is the income range within which a tax rate applies

How do you find tax revenue?

-First of all sis, to find the new equilibrium supply, set the tax price at zero quantity for the new supply curve. -Second of all, you gotta subtract the new price by the price at which the new equilibrium quantity is set by the old supply curve. -Then mutliply by the new equilibrium quantity.

How do you find deadweight loss?

-Old equilibrium quantity minus new equilibrium quantity. -New equilibrium price minus the price at the old supply curve that's not equilibrium.

Who pays a tax?

-Whoever is legally required to send a tax payment to the government pays the tax. -But there can be an important difference between who is legally required to pay the tax and who actually bears the burden of the tax.

When is a tax progressive?

A tax is progressive if people with lower incomes pay a lower percentage of their income in tax than do people with higher incomes. -The federal income tax is an example of a progressive tax.

When is a tax proportional?

A tax is proportional if people with lower incomes pay the same percentage of their income in tax as do people with higher incomes.

When is a tax regressive?

A tax is regressive if people with lower incomes pay a higher percentage of their income in tax than do people with higher incomes.

What are the benefits recieved principal?

According to the benefits-received principle, people who receive the benefits from a government program should pay the taxes that support the program.

Taxes imposed by governments cause what?

Deadweight Loss -There is a loss of consumer surplus because consumers are paying a higher price. The price producers receive falls, so there is also a loss of producer surplus. -Some of the reduction in consumer and producer surplus becomes tax revenue for the government. The rest of the reduction in consumer and producer surplus is equal to the deadweight loss from the tax -Go in textbook for better image (4.4).

What is the deadweight loss from taxes called?

Excess Burden -A tax is efficient if it imposes a small excess burden relative to the tax revenue it raises. -One contribution economists make to government tax policy is to advise policymakers on which taxes are most efficient.

What are property taxes?

Most local governments tax homes, offices, factories, and the land they are built on. -In the United States, the property tax is the largest source of funds for public schools.

What are sales taxes?

Most state and local governments tax retail sales of most products. -More than half the states exempt groceries from the sales tax, and a few states also exempt clothing.

How much do producers actually get after the new tax is imposed?

On the original supply curve, subtract the original equilibrium price from the price of the new equilibrium on the original supply curve.

Analyzing taxes is an important part of the field of economics. -Just as with a price ceiling or price floor, one result of a tax is a decline in economic efficiency. -Whenever a government taxes a good or service, less of that good or service will be produced and consumed.

Public Finance

What other sources of revenue do state and local taxes rely on?

State and local governments rely on a different mix of revenue sources than does the federal government. -In the past, the largest source of revenue for state and local governments was sales taxes. -State and local governments also receive large grants from the federal government

The actual division of the burden of a tax between buyers and sellers in a market.

Tax Incidence

What is the ability to pay principal?

The ability-to-pay principle holds that when the government raises revenue through taxes, it is fair to expect a greater share of the tax burden to be borne by people who have a greater ability to pay. -To follow this principle, the government should attempt to achieve vertical equity by raising more taxes from people with high incomes than from people with low incomes. -The federal income tax is consistent with the ability-to-pay principle. The sales tax, in contrast, is not consistent with the ability-to-pay principle. -Low-income people will pay a greater fraction of their income in sales taxes than will high-income people.

Why do economists debate over the benefits of the corporate income tax?

The corporate income tax ultimately must be paid by a corporation's owners—who are its shareholders—or by its employees, in the form of lower wages, or by its customers, in the form of higher prices. -Some economists argue that if the purpose of the corporate income tax is to tax the owners of corporations, it would be better to do so directly by taxing the owners' incomes rather than by taxing the owners indirectly through the corporate income tax. -Individual taxpayers already pay income taxes on the dividends and capital gains they receive from owning stock in corporations. In effect, the corporate income tax "double taxes" earnings on individual shareholders' investments in corporations.

What are excise taxes?

The federal government and some state governments levy excise taxes on specific goods, such as gasoline, cigarettes, and beer.

What is the corporate income tax?

The federal government taxes the profits earned by corporations -Like the individual income tax, the corporate income tax is progressive, with the lowest tax rate being 15 percent and the highest being 35 percent. -Unlike the individual income tax, however, where relatively few taxpayers are taxed at the highest rate, many corporations are in the 35 percent tax bracket.

What are social insurance taxes?

The federal government taxes wages and salaries to raise revenue for the Social Security and Medicare programs. -Social security and medicare taxes are often called payroll taxes.

What are individual income taxes?

The federal government, most state governments, and some local governments tax the wages, salaries, and other income of households and the profits of small businesses. -The individual income tax is the largest source of revenue for the federal government. Because low-income people do not pay federal individual income taxes, in recent years nearly half of all households have paid no federal income tax.

What is a marginal tax rate?

The fraction of each additional dollar of income that must be paid in taxes. -The marginal tax rate is a better indicator than the average tax rate of how a change in a tax will affect people's willingness to work, save, and invest. -The higher the marginal tax rate, the lower the return you receive from working additional hours and the less likely you are to work those additional hours.

What is horizontal-equity principle?

The horizontal-equity principle states that people in the same economic situation should be treated equally. -Although this principle seems desirable, it is not easy to follow in practice because it is sometimes difficult to determine whether two people are in the same economic situation.

What does the incidice on producers equal?

The net-of-tax price minus the original equilibrium price.

What does the incidice on consumers equal?

The new equilibrium price minus the original equilibrium price.

Since some countries outside the U.S. don't have a corporate income tax, what happens?

The relatively high U.S. corporate tax rate has led many large U.S. firms with significant sales in foreign countries to avoid returning profits earned in those countries back to the United States.

What is a tax code?

The tax code is sometimes used to attain social objectives. Here are two examples: (1) Congress has promoted home ownership by making the interest borrowers pay on home mortgages deductible from the individual income taxes they owe. -Congress also has exempted from the individual income tax compensation employees receive in the form of health insurance and certain other fringe benefits. If you receive a $1,000 raise, you must pay federal income taxes on that amount.

How do you find the tax?

The vertical distance between the supply curve prior to the tax ​and the supply curve with the tax is the size of the tax.

What is the average tax rate?

Total tax paid divided by total income. -When a tax is progressive, as is the federal income tax, the marginal and average tax rates differ. -The average tax rate does not represent the taxes you must pay on the additional income you earn.