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18 Cards in this Set

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  • Back
Explain the benefits principle.
People should pay based on the benefits they receive from the government. A progressive tax is an example of the benefits principle. Rich people have more use for the government than the poor. They have more to lose so they need things like police, national defense, firemen, etc.
Explain the ability to pay principle.
The ability to pay principle basically says that people should have to pay what they can afford to. Everyone should make equal sacrifices relative to their respective incomes.
What is vertical equity?
Vertical equity basically says the more you make, the more you pay.
What is horizontal equity?
Horizontal equity is where everyone who makes that same pays the same. This is often hard to achieve though because different families have different expenses. Family A and B both have incomes of 100k. Family a has 30k in tution, family b has 10k in med expenses. An important issue is whether these two families should have to pay the same thing.
How does the "Marriage Tax" work?
For tax purposes, a married couple is considered to have 1 income. If Husband makes 50k and wife makes 50k, separately they are responsible for 25% of 40k which is 10k (total of 20k for 100k of income). Married, they make 100k. 90% taxable at 25% is 22500. There is a "Marriage Tax" of 2500.
Why is studying tax incidence important for determining the equity of a tax system?
It is important because it studies who bears the burden of taxes. When a large corporation is taxed heavily, those taxes are passed on to consumers and employees, hurting the middle and lower class more than it hurts the upper class. Most voters just see that the major corporations are being taxed and this is certainly a good thing. This ignorance of the system is often referred to by economists as the flypaper theory.
Budget deficit
when all reciepts come short of all spending
Budget surplus
when all reciepts exceed spending. The excess is then used to payoff some of the national debt.
average tax rate
the average tax rate is the total taxes paid divided by gross income x 100. The ATR is a good way of measuring the sacrifice made by a person, because is measures the fraction of income paid by the taxpayer
marginal tax rate
The percentage of how much an additional dollar of income will by taxed. MTR is used in measuring how much the tax system distorts incentives. Shows how much taxes discourages people from working.
lump sum tax
everyone pays the same thing. it is equal, but because everyone is in a different situation, this does not adequatly share the burden. poor people feel the burden more. It is the most efficent tax possible because regardless how much one works, the amount of taxes are going to be the same. Minimal administrative burden on taxpayers
benefits principle
states that a rich person should have to pay more taxes because they use more of the government resources. they have more to lose/ protect
ability-to-pay principle
idea that everyone should have an equal sacrifice. income and special circumstances should all be taken into consideration. everyone should have to shoulder an equal amount
verticle equity
basically says that taxpayers with a greater ability to pay should pay a larger amount.
horizontal equity
people with similar financial circumstances should be required to pay the same.
proportional tax
everyone should pay the same percentage of income.
as a person makes more, the percentage of tax he or she pays becomes less and less
US has progressive; as income increases, so does the percentage of income a person is required to pay in the form of taxes.