67 Cards in this Set
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Government collects ___ cents from ever dollar of income
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30
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Types of taxes
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FICA, Income, Sales, and Property
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Average Tax Rate
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Taxes paid/income
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Marginal Tax Rate
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changes in taxes in paid/ changes in income
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Federal Insurance Contributions Act (FICA)
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Funds social security and medicare
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Social security pays a flat rate of ___% on income to a certain level
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12.4
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Medicare pays flat rate of ___% of all earnings (it is also split between employee and employer)
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2.90
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Individual Income Tax
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Enormous generator of tax that is the most complex. There are federal and state levels but some states don't have this.
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Taxable Income
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income on which tax is paid after adjustments
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Personal Exemptions
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...
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Tax Deductions
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Single person: $6,200
Couple: $12,400
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Tax brackets
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taxable income divided into segments with different tax rates
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Progressive Tax System
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higher dollars are taxed at higher rates
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Regressive Tax System
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higher dollars taxed at lower rates
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Proportional Tax System "Flat Tax"
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everyone pays same % of their income I'm taxes regardless of income
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Value of a tax deduction
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$ deduction x marginal tax rate
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Value of a tax credit
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$ credit = amount saved on taxes
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Sales Tax
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Pay tax rate on value of retail sales (considered regressive). Also used by state and local and governments
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Property Tax
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Main revenue source for local governments. It is the tax on residential and commercial property (buildings, vehicles, etc.)
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Issue With Property Tax
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Is it necessarily "up-to-date"
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Tax Incidence
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distribution of tax burden among taxpayers, who ultimately pays the tax
Example: Landlord pays property tax, but increases rent to cover the tax
Depends on price elasticity of demand
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More ____ the easier to pass on cost of the tax to the buyer
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inelastic
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More _____ harder to pass on cost of the tax to the buyer
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elastic
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1990s Tax on Yachts
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Government though an easy way to increase tax revenue. Yacht builders passed the tax to the buyers so demand decreased for American made yachts. One of the only taxes that was repealled.
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Potential Functions of a Government in a Market Economy
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1. address externalities
2. provide public goods
3. enhance public safety
4. pursue anti-trust activity
5. regulate choice
6. redistribute income
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Anti-trust
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evaluating, regulating, or breaking up monopolies or prosecuting collusive oligopolies
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Examples of Public Safety
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court system, law enforcement, policy enforcement, contract enforcement
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Horizontal Mergers
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both companies produce same product/service (Comcast/Time Warner)
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Vertical Mergers
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companies are at different stages of production (Comcast and NBC Universal0
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Conglomerate Mergers
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Two unrelated companies (Microsoft and Quaker)
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Key to economic development
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protecting private property and enforcing contracts is a....
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Why regulate choice and example
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person not capable of making choices for themselves. ex- age- children's cognitive and physical development not at level to be able to make many decisions
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Asymmetric Information
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seller has more information than buyers (ex: medical/financial)
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control externalities
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unintended side impact of an action
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negative externality
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An undesirable by-product
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Positive externality
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Example: education
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Problem with Externality
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Entity creating the externality doesn't face the financial cost or benefit for it. Result= too many products with negative externalities are made and too few products with positive externalities are made
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Solution to Externality
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Negotiation result depends on who has "property rights" (Ex: railroad and farmers)
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Negotiation doesn't work when ____ numbers of people are impacted. The best solution is to ___ the action generating the negative externality, where tax equals the cost of harm done and _____ the action generating the positive externality, where subsidy equals value of benefit done
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Large; tax; subsidize
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Examples of Subsidies
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1. Flu shots
2. Education
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Example of Taxes
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1. Cigarette
2. Alcohol
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A negative externality tax that has been proposed
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Carbon tax from driving, power (electricity) because use of power is generated from a fuel emitting carbon
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Don't use revenue from negative externality tax
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for something unrelated to the pollutant
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Tax/subsidy approach to externalities and free choice
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free choice is still preserved, but now choices creating negative externalities pay the cost and choices creating positive externalities are rewarded
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Example of when outright requirement or prohibition is the best approach
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Mandatory schooling to age 16 or prohibited smoking on plane
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Cap and Permit for Pollution
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Three step process:
1. experts decide how much pollution is acceptable
2. sell permits to pollute based on acceptable level
3. allow permits to be traded
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Should consumption of certain ____ linked to obesity be taxed as a negative externality?
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foods
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public goods
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product/service which once provided is available for all to use, or is costly to exclude others
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private goods
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once used, is not available to anyone else (Ex: burger)
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Free-rider
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wait for someone else to pay for the problem (Ex: mosquito control around lake neighborhood)
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National Defense
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once the military is provided all in US are protected (public good)
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Standard Roads
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once built, expensive to exclude drivers (Ex: gates/ road blocks) another example of a public good
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Public Safety
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all benefit from criminals being caught and fires being prevented-especially in cities
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Issue with Public Good: everyone must consume the same amount
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"One size fits all"
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Issue with public goods: public money pays for private facilities/services
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separate funding fro the provision
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______ can change what qualifies as a public good
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Technology (Ex: modern toll roads as private goods)
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Income Redistribution
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- most controversial of government functions
- transferring income and resources from some households to other households
- involves many programs- totaling over $1.5 trillion annually
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Supporters of income redistribution say ______ is still significant (15%-20%) and _______ _________ has increased
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poverty; income inequality
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Detractors of income redistribution say that programs _____ self-sufficiency and financial independence
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reduce
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How to measure poverty
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1. absolute
2. relative
(income vs. consumption)
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Absolute measure of poverty
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Those who are below the poverty line
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relative measure of poverty
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–there is no absolute standards; poverty must be defined in relationship to what the average family has.
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Cash Redistribution of Income
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TANF, EITC
easiest to administer
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Non-cash "In-kind" Redistribution of Income
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food stamps, nutrition programs, medicaid
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Issue with Income Redistribution: Phasing out help
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as income rises- effective marginal tax rates can be high
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Issues with Income Redistribution: Taxes on those providing work
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Disincentives to work
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Government _______ private charities
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"crowds-out"
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ARE 201: EXAM 3