Ch 6: Taxation, Revenue Options

Question 1

Governments collect most revenue through

Answer 1

Taxes

Question 2

T or F, Constitution prohibits states from collecting custom duties

Answer 2

T

Question 3

Primary revenue sources at different levels of government

Answer 3

Federal: income tax (49.6%)
State: Income + sales
Local: Property (29.2), sales,

Question 4

Taxes are Compulsory

Answer 4

If one belongs to a tax base, they pay the tax regardless of whether they use the services

Question 5

Criteria for evaluating fairness of a tax

Answer 5

1. adequacy of revenue production
2. equity
3. collectability
4. economic efficiency effects

Question 6

T or F, Corporate taxes are more stable than property taxes

Answer 6

F

Question 7

A growing economy is challenging for governments because…

Answer 7

of increased demand for services outpaces increases in revenues.

Question 8

Elasticity of Service Expenditure

Answer 8

A 1% increase in income generates an increase in government spending >1%

Question 9

Responsive taxes

Answer 9

Taxes whose revenue increases more rapidly than income.

The revenue elasticity is > than income elasticity of service expenditure.

Question 10

Most responsive tax

Answer 10

Individual income tax

Question 11

Least responsive tax

Answer 11

Tobacco tax

Question 12

Tax with intermediate responsiveness

Answer 12

Sales tax

Question 13

Price elasticity of demand

Answer 13

% change in quantity demanded/% change in price.

Example: Apple reduced price of airpods from $150 to $125. Sales increased from 200 to 250 per week. PED is 1.5–this means that the demand is elastic. (any number greater than 1 is elastic)

Question 14

Two approaches to equitable taxation

Answer 14

1. Benefits received (market like approach)
2. Ability to pay

Question 15

Equity: Benefits received

Answer 15

User charges, assumes that no services have free riders.

Example–fuel taxes pay for highways

Question 16

Equity: Ability to pay

Answer 16

Requires that those most capable of bearing the tax burden pay the most – even if they don’t receive services.

Question 17

Horizontal Equity Dimension

Answer 17

Comparison is among EQUALS

If two taxpayers equal in all relevant aspects pay significantly different tax amounts, the tax system lacks horizontal equity

Question 18

Lack of horizontal equity results when

Answer 18

Individuals pay especially-priced taxes based on personal preferences
Tax loopholes are used unfairly by a few taxpayers
Capricious tax administration is applied
Particularly difficult cases exist (e.g., property tax valuation)

Question 19

Vertical Equity Dimension

Answer 19

Comparison is among UNEQUALS

Redistribution of wealth is key to vertical equity
Vertical equity relates income to effective tax rates
Effective tax rates = tax paid / income

Question 20

Federal income tax is

Answer 20

generally progressive

Question 21

Payroll taxes are

Answer 21

generally regressive, although easy to collect

Question 22

Income taxes are

Answer 22

generally proportional or slightly regressive

Question 23

Sales taxes are

Answer 23

regressive, but depends on whether food/ prescription drugs are exempted

Question 24

Property taxes

Answer 24

Equity complicated by capricious assessment practices

Question 25

Forward tax shifting

Answer 25

Business charges higher prices to pay for the tax

Question 26

Backward tax shifting

Answer 26

Business lowers wages or price they pay for goods to shift tax

Question 27

Absorption

Answer 27

Tax is absorbed by the the business and results in a lower return to business owners

Question 28

T or F, All taxes are ultimately borne by individuals

Answer 28

True

Examples–social security and property tax on rental units