Taxes

Why does the government tax?

1)Finance government operations 2)Influence economic behavior of firms and individuals

What are the 3 tools the FED uses to control monetary policy? Briefly explain what happens to the money supply when the FED uses these tools?

1. open-market operations, 2. the discount rate and 3. the reserve requirements. Through the use of these three tools, the Fed can manipulate market movements to exercise control over the economy. Changing the reserve requirements, the amount of money banks need to hold on hand, also changes the amount of money available for lending in the overall economy.

How many reserve banks are there?

12

Explain the impact of deadweight loss.

A deadweight loss is a cost to society created by market inefficiency. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings, such as price controls and rent controls; price floors, such as minimum wage and living wage laws; and taxation can all potentially create deadweight losses.

Gift Tax

A gift tax is a federal tax applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, but may pay an amount less than its full value.

Marginal Tax Rate

A marginal tax rate is the tax rate incurred on each additional dollar of income. The marginal tax rate for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon their earnings, with low-income earners being taxed at a lower rate than higher income earners.

Budget Surplus

A period when income or receipts exceed outlays or expenditures. A budget surplus often refers to the financial states of governments; A surplus is an indication that the government is being effectively managed.

Proportional Tax

A proportional tax is an income tax system where the same percentage of tax is levied on all taxpayers, regardless of their income. A proportional tax applies the same tax rate across low, middle, and high- income taxpayers.

Sin Tax

A sin tax is an excise tax on socially harmful goods. An excise tax is a flat tax imposed on each item sold. The most commonly taxed goods are alcohol, cigarettes, gambling, and pornography. Excise taxes are collected from the producer or wholesaler. They drive up the retail price for consumers.

Regressive Tax

A tax applied uniformly, taking a larger percentage of income from low-income earners than from high-income earners.

Estate Tax

A tax levied on an heir's inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law. The estate tax is mostly imposed on assets left to heirs.

Luxury Tax

A tax placed on products or services that are deemed to be non-essential or unneeded. The luxury tax is an indirect tax in that the tax increases the price of the good or service, a price inflationary burden which is only incurred by the end consumer.

Payroll Taxes

A tax that an employer withholds from an employee's salary and pays on behalf of his employees. The payroll tax is based on the wage or salary of the employee.

Why do taxes such as the income tax, not meet the criteria for a "Good" tax?

Because Income taxes have loopholes and deductions and they are not simple or efficient.

Medicare/Medicaid

Medicare and Medicaid are health insurance programs sponsored by the federal government that cover medical expenses for elderly, disabled, and low-income Americans.

Explain the difference between Fiscal Policy and Monetary Policy

Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nation's economic activity. Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks, such as the U.S. Federal Reserve. Fiscal policy is a collective term for the taxing and spending actions of governments. In the United States, the national fiscal policy is determined by the executive and legislative branches of the government.

FICA Tax

"Federal Insurance Contributions Act." FICA tax is the money that is taken out of workers' paychecks to pay older Americans their Social Security retirement and Medicare (Hospital Insurance) benefits. It is a mandatory payroll deduction.

Income Tax

A tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations.

Progressive Tax

A tax that imposes a lower tax rate on low-income earners compared to those with a higher income, making it based on the taxpayer's ability to pay. That means it takes a larger percentage from high-income earners than it does from low-income individuals.

Intergovernmental Revenue

Amounts received from other governments as fiscal aid in the form of shared revenues and grants-in-aid, as reimbursements for performance of general government functions and specific services for the paying government, or in lieu of taxes.

Corporate Income Tax

An assessment taxed by a government on the profits of a company.

Excise Tax

An indirect tax on the sale of a particular good or service such as fuel, tobacco and alcohol. Indirect means the tax is not directly paid by an individual consumer — instead, the Internal Revenue Service (IRS) levies the tax on the producer or merchant, who passes it onto the consumer by including it in the product's price.

Intermediate goods/final goods

An intermediate good is a product used to produce a final good or finished product—also referred to as a consumer good.

When was the Fed created?

December 23, 1913

Explain the ability to pay principle.

Economics concept that those who have more resources (wealth), or earn higher incomes, should pay more taxes. The ability to pay taxes (such as income tax or tax on luxury goods) are used as means of income redistribution. Also called ability to pay tax.

GDP

Gross Domestic Product (GDP) is a broad measurement of a nation's overall economic activity. GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

Property Tax

Real estate tax, calculated by a local government, which is paid by the owner of the property. The tax is usually based on the value of the owned property, including land.

Reserve Requirement

Reserve requirements are the amount of cash that banks must have, in their vaults or at the closest Federal Reserve Bank, in line with deposits made by their customers.

User Fees

Sum of money paid as a necessary condition to gain access to a particular service or facility. Example: highway tolls or parking garages.

Explain the Benefit Principle or taxes?

Taxation concept that those who benefit more from government expenditure should pay more taxes to support such expenditure.

What is the effect of taxes on supply and demand?

Taxes may be imposed on both a micro-level, involving specific products or services, or the macro-level, involving income or profits. The imposition of either type of tax has an implication on the supply and demand framework. Specifically, it causes shifts in supply and demand, which in turn lead to new levels of quantity and prices in an economy.

Social Security

Term used for the Old-Age, Survivors, and Disability Insurance (OASDI) program in the United States, run by the Social Security Administration (SSA).

FICA

The Federal Insurance Contributions Act (FICA) is a U.S. law that mandates a payroll tax on the paychecks of employees, as well as contributions from employers, to fund the Social Security and Medicare programs.

How do we measure GDP?

The GDP or gross domestic product of a country provides a measure of the monetary value of the goods and services that country produces in a specific year. This is an important statistic that indicates whether an economy is growing or contracting. In the United States, the government releases an annualized GDP estimate for each quarter and also for an entire year.

What are the 3 categories that make up our Tax Criteria?

The first criteria on is equity or fairness, meaning that taxes should be impartial. The second criterion is simplicity, meaning that tax laws should be written so that both the taxpayer and the tax collector can understand them. The third criterion is efficiency, meaning that the tax should be relatively easy to administer and reasonably successful at generating revenue. FES Fair - Efficient - Simple

Monetary Policy

The process of drafting, announcing, and implementing the plan of actions taken by the central bank, currency board, or monetary authority of a country that controls the quantity of money in an economy and the channels by which new money is supplied.

Fiscal Policy

The use of government spending and tax policies to influence economic conditions, including demand for goods and services, employment, inflation and economic growth.

How does the GDP demonstrate the wealth of the nation?

The wealth of a nation is similar to that of a person: the value of their things minus their debts, and expenses spent getting or keeping those things. So in lots of ways, we can think of national wealthsimply as the 'net worth' of a given nation.

Budget Deficit

a shortfall of tax revenue from government spending

Describe the function of the Federal Reserve

conducts the nation's monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy; • promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad; • promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole; • fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and • promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.

Normal GDP

measures the total dollar amount of final goods and services produces within the US

Customs Duties

taxes on foreign imported goods

What is the money multiplier?

the amount of money the banking system generates with each dollar of reserves

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

Real GDP

the production of goods and services valued at constant prices

Deadweight Loss (DWL)

the reduction in total surplus that occurs as a result of a market inefficiency

What is gross domestic product?

the total value of goods produced and services provided in a country during one year.