chapter 10

Question 1

3 levels of government:

Answer 1

Federal
State
Local
All can collect taxes and spend revenues

Question 2

Budget Surplus

Answer 2

Tax revenues are greater than spending

Question 3

Budget deficit

Answer 3

Spending is greater than tax revenue

Question 4

tax revenues or receipt

Answer 4

the money government collects through taxes;
Individual income taxes- 47% of total revenue
Payroll Taxes (withheld from pay)–34% of total revenue
Corporate income tax (taxes on profits)– 10% of total revenue
Other taxes

Question 5

payroll tax

Answer 5

is a tax on the wages

34% of total revenue

Question 6

Individual income taxes

Answer 6

Individual income taxes- 47% of total revenue

Question 7

Corporate income tax

Answer 7

are taxes paid by firms to the government from their profits

10% of total revenue

Question 8

excise taxes

Answer 8

are taxes paid when purchasing a specific good

Question 9

sales taxes

Answer 9

paid by a buyer, as a percentage of the sale price of an item

Question 10

What are the main factors of government taxation and spending?

Answer 10

1. Raise revenues to pay for public good
2. Redistribute income to address fairness issues
   Governments can address equity issues through:
   Transfer payments
   The tax structure
3. Finance operations of government
4. Correct market failures and externalities

Question 11

transfer payments

Answer 11

occur when the government gives part of its tax revenue to some individual or group

Question 12

Progressive Tax System

Answer 12

System in which average and marginal tax rates are higher for higher income levels

Question 13

Average Tax Rate

Answer 13

Total taxes divided by total income

Question 14

Marginal Tax Rate

Answer 14

The rate paid on the last dollar of income

Question 15

Proportional Tax System

Answer 15

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

I.e. marginal and average tax rates are the same for everyone

alternative to progressive tax system

Question 16

Regressive Tax System

Answer 16

System in which the lower the income, the higher the percentage of income is paid in taxes
I.e. marginal and average tax rates fall as income rises

Question 17

tax incidence

Answer 17

refers to how the burden of taxation is disturbed.

shared between a buyer and a seller

Question 18

deadweight loss of taxation *

Answer 18

pg 240

Question 19

Direct Regulation

Answer 19

Attempts by the government to control the amount of an activity
Also called command and control regulation
I.e. FDA, EPA

Question 20

Price Ceiling

Answer 20

A cap ( or maximum) on the price

Question 21

price floor

Answer 21

is a lower limit (below which the price cannot fall) on the price of a market good

Question 22

government failures

Answer 22

refer to inefficiencies caused by a government’s interventions causing:

Deadweight losses
Increased costs due to bureaucracy
Corruption
Black Markets

Question 23

direct costs of Bureaucracies

Answer 23

The greater the number of regulations and tax collections =

the greater the number of government workers needed to enforce them

Question 24

Corruption

Answer 24

Misuses of public funds
Can be a cost of government activity
Not confined to government sector - corruption exists in private sector as well

only 5 to 15 % money amount reaches its intended destination

Question 25

black markets

Answer 25

undermines ground economy ban

transactions for legal goods and service in order to avoid taxes or regulations put business at disadvantage

to compensate for lost revenue, governments must levy higher taxes

criminals spend vast resources trying to evade the law

Question 26

Equity-efficiency trade off

Answer 26

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

Question 27

welfare state

Answer 27

refers to the set of insurance, regulation. and transfer programs operated by the government, including unemployment benefits, pensions, and government-run and -financed healthcare

Question 28

consumer sovereignty

Answer 28

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

consumers should be allowed to make their own choices because:
The government can’t know what’s best for us
The government can’t be trusted to act in our best interests
If the government intervenes, there are costs

Question 29

paternalism

Answer 29

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

Government should help consumers make choices because:
Some decisions are very complex and individuals do not have enough info
If an individual behavior benefits the larger society, the government should encourage that behavior

Question 30

Optimal size of government

Answer 30

1. A major efficiency loss of taxation is deadweight loss. The debate on the reach of government should hinge on the effect of its actions; the larger the deadweight loss, the worse the policy, all else being equal
2. A significant drag on the economy can result if regulators cannot move swiftly in response to changing market conditions.

Question 31

Where does the state and local money come from?

Answer 31

Other - 30% tolls, taxes on licenses
Revenue from federal government-- 22%--Federal Tax redistributed to state/local governments
Sales and gross receipts taxes - 18%
Property Taxes-- 17%
Individual Income Taxes--13%

Question 32

where does federal government spend money

Answer 32

national defense- 18%
health- 10%
medicare- 14%
income security- 16% 
social security- 24%
other-18%

Question 33

where does state and local spend money

Answer 33

other - 29%
education- 27%
public welfare- 16%
insurance- 11%
utilities-7%
highways- 5%
hospitals- 5%