chapter 10 Flashcards
3 levels of government:
Federal
State
Local
All can collect taxes and spend revenues
Budget Surplus
Tax revenues are greater than spending
Budget deficit
Spending is greater than tax revenue
tax revenues or receipt
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
payroll tax
is a tax on the wages
34% of total revenue
Individual income taxes
Individual income taxes- 47% of total revenue
Corporate income tax
are taxes paid by firms to the government from their profits
10% of total revenue
excise taxes
are taxes paid when purchasing a specific good
sales taxes
paid by a buyer, as a percentage of the sale price of an item
What are the main factors of government taxation and spending?
- Raise revenues to pay for public good
- Redistribute income to address fairness issues
Governments can address equity issues through:
Transfer payments
The tax structure - Finance operations of government
- Correct market failures and externalities
transfer payments
occur when the government gives part of its tax revenue to some individual or group
Progressive Tax System
System in which average and marginal tax rates are higher for higher income levels
Average Tax Rate
Total taxes divided by total income
Marginal Tax Rate
The rate paid on the last dollar of income
Proportional Tax System
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
Regressive Tax System
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
tax incidence
refers to how the burden of taxation is disturbed.
shared between a buyer and a seller
deadweight loss of taxation *
pg 240
Direct Regulation
Attempts by the government to control the amount of an activity
Also called command and control regulation
I.e. FDA, EPA
Price Ceiling
A cap ( or maximum) on the price
price floor
is a lower limit (below which the price cannot fall) on the price of a market good
government failures
refer to inefficiencies caused by a government’s interventions causing:
Deadweight losses
Increased costs due to bureaucracy
Corruption
Black Markets
direct costs of Bureaucracies
The greater the number of regulations and tax collections =
the greater the number of government workers needed to enforce them
Corruption
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
black markets
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
Equity-efficiency trade off
The balance between ensuring an equitable allocation of resources (equity) and increasing social surplus or total output (efficiency)
welfare state
refers to the set of insurance, regulation. and transfer programs operated by the government, including unemployment benefits, pensions, and government-run and -financed healthcare
consumer sovereignty
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
paternalism
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
Optimal size of government
- 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
- A significant drag on the economy can result if regulators cannot move swiftly in response to changing market conditions.
Where does the state and local money come from?
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%
where does federal government spend money
national defense- 18% health- 10% medicare- 14% income security- 16% social security- 24% other-18%
where does state and local spend money
other - 29% education- 27% public welfare- 16% insurance- 11% utilities-7% highways- 5% hospitals- 5%
