Econ 28, Exam #3

Front 1

statutory incidence

Back 1

indicates who is legally responsible for a tax

Front 2

economic incidence

Back 2

change in distribution of real income caused by a tax; the actual burden of a tax

Front 3

tax shifting

Back 3

difference between statutory and economic incidence

Front 4

functional distribution of income

Back 4

how income is distributed among people who are classified according to inputs they supply to the production process

Front 5

size distribution of income

Back 5

the way total income is distributed across income classes

Front 6

lump sum tax

Back 6

tax whose value is independent of the individual's behavior

Front 7

proportional

Back 7

tax system under which average tax rate is same at each level of income

Front 8

average tax rate

Back 8

ratio of taxes paid to income (where income is taxable income or AGI?)

Front 9

progressive

Back 9

tax system under which an individual's average tax rate increases with income

Front 10

regressive

Back 10

tax system under which an individual's average tax rate decreases with income

Front 11

marginal tax rate

Back 11

proportion of the last dollar of income taxed by the government

Front 12

partial equilibrium models

Back 12

models that only study one market and ignore possible spillover effects in other markets

Front 13

unit tax

Back 13

tax levied as a fixed amount per unit of commodity purchased

Front 14

tax wedge

Back 14

tax-induced difference between price paid by consumers and price received by producers

Front 15

tax salience

Back 15

extent to which a tax rate is made prominent to a taxpayer

Front 16

ad valorem tax

Back 16

tax computed as a percentage of purchase value

e.g. payroll tax on wages

Front 17

economic profit

Back 17

return to owners of a firm above opportunity costs of all factors used in production

Front 18

capitalization

Back 18

process by which a stream of tax liabilities becomes incorporated into the price of an asset

Front 19

general equilibrium analysis

Back 19

study of how various markets are interrelated

Front 20

partial factor tax

Back 20

tax levied on an input in only some of its uses

Front 21

elasticity of substitution

Back 21

ease with which one factor of production can be substituted for another

Front 22

capital intensive

Back 22

industry in which ratio of capital to labor is relatively high

Front 23

tax-interaction effect

Back 23

increase in excess burden in labor markets due to reduced wages from Pigouvian taxes

Front 24

excess burden

Back 24

loss of welfare above and beyond taxes collected; deadweight loss

Front 25

equivalent variation

Back 25

change in income that has same effect on utility as a change in the price of a commodity

Front 26

lump sum tax

Back 26

tax whose value is independent of an individual's behavior

Front 27

income effect

Back 27

effect of price change on quantity demanded due exclusively to the fact that the consumer's income has changed

Front 28

substitution effect

Back 28

tendency of an individual to consume more of one good and less of another because of a decrease in the price of one good relative to the other

Front 29

compensated demand curve

Back 29

demand curve that shows how quantity demanded varies with price, holding utility constant

Front 30

theory of the second best

Back 30

in the presence of existing distortions, policies that in isolation would decrease efficiency can increase it and vice versa

Front 31

double-dividend effect

Back 31

using proceeds from a Pigouvian tax to reduce inefficient tax rates

Front 32

AGI

Back 32

adjusted gross income

total income from all taxable sources less certain expenses incurred in earning that income

Front 33

taxable income

Back 33

amount of income subject to tax

Front 34

exemption

Back 34

when calculating taxable income, the amount per family member that can be subtracted from AGI

Front 35

deductions

Back 35

certain expenses that may be subtracted from AGI in the computation of taxable income

Front 36

rate schedule

Back 36

shows the tax liability associated with each level of taxable income

Front 37

Haig-Simons definition of income

Back 37

money value of a net increase in an individual's power/potential to consume during a period

saving must included

Front 38

capital gain

Back 38

increase in the value of an asset

Front 39

realized capital gain

Back 39

capital gain resulting from the sale of an asset

Front 40

unrealized capital gain

Back 40

capital gain on an asset not yet sold

Front 41

lock-in effect

Back 41

disincentive to change portfolios because an individual incurs a tax on realized capital gains but not unrealized gains

Front 42

IRA

Back 42

individual retirement account

$5500 per year limit

savings account in which the contributions are tax deductible and savings accrue tax free until withdrawal at retirement, at which point both contributions and accrued interest are subject to tax

Front 43

Roth IRA

Back 43

$5500 per year limit

contributions are not tax deductible, but interest accrues tax free

tax-preferred savings vehicle

Front 44

401(k) plan

Back 44

savings plan under which an employee can earmark a portion ($17,000 in 2012) of income each year, with no income tax liability incurred on that portion

Front 45

Keogh Plan

Back 45

savings plan that allows self-employed individuals to exclude a 20% of their net business income (up to $50,000) from taxation if money is deposited into a qualified account

Front 46

Education Savings Account

Back 46

tax-preferred savings vehicle

contributions aren't tax deductible but they accumulate tax fee; funds can only be used for higher education expenses of a child

Front 47

itemized deduction

Back 47

specific type of expenditure that can be subtracted from AGI in computation of taxable income

Front 48

standard deduction

Back 48

fixed amount subtracted from AGI that doesn't require documentation

Front 49

tax credit

Back 49

subtraction from TAX LIABILITY (not taxable income)

favors those with lower marginal tax rates (compared to deductions/exemptions, which affect taxable income)

Front 50

tax expenditure

Back 50

loss of tax revenue due to an item being excluded for tax base or receiving other preferential treatment

Front 51

tax indexing

Back 51

automatically adjusting tax schedule to compensate for inflation so that an individual's real tax burden is independent of inflation

Front 52

bracket creep

Back 52

increase in individual's nominal income pushes the individual into a higher tax bracket despite unchanged real income

Front 53

real income

Back 53

measure of income that accounts for changes in general price level

Front 54

nominal income

Back 54

income measured in terms of current prices

Front 55

nominal interest rate

Back 55

interest rate observed in the market

Front 56

AMT

Back 56

alternative minimum tax

tax liability calculated by an alternative set of rules designed to force individuals with substantial preference income to incur at least some tax liability

tends to be poor policy b/c it taxes away preferences of greatest importance to middle-income taxpayers

also, why not just take away certain deductions/preferences instead

minimum rate under AMT is 26%, which is really high

pay the difference between tentative AMT and income tax

usually kicks in at 150k-400k income

Front 57

marriage neutral

Back 57

individuals' tax liabilities are independent of marital status

Front 58

income splitting

Back 58

using half of family income to determine each family member's taxable income, regardless of whose income it is

Front 59

global system

Back 59

system under which an individual is taxed on income, whether it is earned in the home country or abroad

Front 60

territorial system

Back 60

system under which an individual earning income in a foreign country owes taxes only to host government

Front 61

tax inversion

Back 61

overseas relocation of a company's legal domicile to a lower tax-nation to escape taxes

Front 62

How does Apple avoid taxes?

Back 62

Foreign revenues (60% of Apple's revenue) flow through subsidiaries in Ireland, where Apple's companies claim non-residency b/c they are managed elsewhere; thus, Apple's foreign revenues are exempt from corporate tax. These revenues are ultimately re-routed to the Cayman islands, which are essentially a tax haven.

US revenues are used to fund the use of patents, so net income is zero in US.

Front 63

Check-the-box rule

Back 63

Allows taxpayers to decide to treat a foreign corporation as if it doesn't exist for US law

Front 64

repatriation

Back 64

process of returning money back to US

Front 65

problems with corporate tax

Back 65

-high corporate tax rates

-tax inversion

-loss of tax revenue

-revenue tied up in other countries

-disincentives to invest in US

-inability to reinvest profits without paying additional high marginal tax rate

-replacing global system is a better fix than lowering corporate tax rates b/c there will always be countries w/ really lower corporate tax rates

-little correlation between statutory rate and inversions

Front 66

earnings stripping

Back 66

method of avoiding taxes by paying excessive amount of interest to parent company

Front 67

transfer pricing

Back 67

shifting profits out of US to lower-tax countries via cross-border, non-market-based payments

Front 68

Why don't we abolish the corporate income tax?

Back 68

-would result in tax haven for the wealthy

-represents a significant portion of federal gov't revenue

Front 69

balanced-budget incidence

Back 69

incidence of a tax that accounts for how revenue earned from tax is spent

Front 70

formula for tax incidence?

Back 70

Front 71

formula for excess burden?

Back 71

Front 72

absolute tax incidence

Back 72

examines the effects of a tax when there is no change in either other taxes or government expenditures

Front 73

differential tax incidence

Back 73

examines how incidence differs when one tax is replaced with another, holding the government budget/revenue constant