chapter 10

Question 1

Budget surplus vs budget deficit

Answer 1

Budget surplus: Tax revenues are greater than spending.
Budget deficit: Spending is greater than tax revenues.

Question 2

Where do federal taxes come from?

Answer 2

1. Individual income taxes—roughly 51%
2. Payroll taxes (social insurance tax)—about 37%
3. Corporate income tax (taxes on profits)—7%
4. All other taxes (includes excise taxes on alcohol, tobacco, and gasoline)—5%

Question 3

Where do state taxes come from?

Answer 3

1. All other (tolls, taxes on licenses)—28%
2. Intergovernmental revenue (federal taxes redistributed to state/local governments)—23%
3. Sales taxes—19%
4. Property taxes—17%
5. Individual income taxes—13%

Question 4

Transfer Payments

Answer 4

Payments from the government to certain groups, such as the elderly or the unemployed

Question 5

Progressive tax system

Answer 5

Tax rates increase with taxable base incomes, so that the rich pay higher tax rates than the less well-to-do

Question 6

Regressive tax system

Answer 6

System in which the lower the income, the higher percentage of income is paid in taxes

Question 7

Proportional tax system

Answer 7

System in which everyone pays the same proportion of their income in taxes, regardless of how much their income is

Question 8

Average tax rate

Answer 8

Total taxes divided by total income.

Question 9

Marginal tax rate

Answer 9

the rate paid on the last dollar of income

Question 10

Gini coefficient

Answer 10

a measure of overall income inequality

Question 11

poverty rate

Answer 11

is defined as the percentage of the population that earns less than 50 percent of the median income in the country

Question 12

tax incidence

Answer 12

the division of a tax burden between stakeholders, such as buyers and sellers or producers and consumers

Question 13

direct regulation

Answer 13

Attempts by the government to control the amount of an activity

Question 14

direct regulation

Answer 14

Attempts by the government to control the amount of an activity

Question 15

price controls

Answer 15

Attempts by the government to control the
price of an activity (Price Ceilings and Price
Floors)

Question 15

price controls

Answer 15

Attempts by the government to control the
price of an activity (Price Ceilings and Price
Floors)

Question 16

government failures

Answer 16

refer to inefficiencies caused by a government’s
interventions.

Question 17

Equity-efficiency trade-off

Answer 17

The balance between ensuring an equitable allocation of resources (equity) and increasing
social surplus or total output (efficiency)

Question 18

welfare state

Answer 18

refers to the set of insurance, regulation, and transfer programs operated by the government

Question 19

Consumer sovereignty

Answer 19

is the view that choices made by a consumer reflect his or her true preferences, and outsiders, including the government, should
not interfere with these choices.

Question 20

Paternalism

Answer 20

is the view that consumers do not always know
what is best for them, and the government should encourage or induce them to change their actions.