Chapter 16 Flashcards
Tools of Fiscal Policy
- Taxes
- Expenditures
- Regulations
Taxes
Payed on incomes, goods and services to:
- discourage certain activities.
- provide resources for public expenditures.
Expenditures
Payed on certain goods and services (e.g. roads, education) and transfer payments that provide resources to individuals.
Regulations
Directions that urge people to perform or refrain from certain activities (e.g. limit amount of pollution for firms, mandate testing new drugs).
Functions of Governments
- Improve economic efficiency.
- Reduce economic inequality.
- Stabilize the economy through policies.
- Conduct international economic policy.
Reducing Economic Inequality
Income redistribution through taxes.
Stabilizing the Economy
The government should work on preventing depression, inflation and unemployment through setting the right policies, like fiscal and monetary.
Conducting International Economic Policy
- Reducing trade barriers.
- Coordinating macroeconomic policy.
- Protecting the global environment.
Improving Economic Efficiency
- Government should ensure fulfillment of contracts and prevent fraud.
- Government should ensure perfect competition ( avoid monopolies).
- Government should control air pollution,…
Public-Choice Theory
Branch of economics and political science that studies the way governments make decisions.
Levels of Governments
Federal, state and local.
Federal Government
Direct activities concerned with the whole nation.
State Governemnt
Builds roads, run university systems.
Local Government
Education, police streets and remove garbage.
Benefit Principle
Taxes should be in proportion to the benefit received.
Ability-to-Pay Principle
Amount of taxes paid should be related to income level, the higher the income the more taxes paid.
Horizontal Equity
Everyone pays the same as long as they are equal.
Vertical Equity
Considers level of income in taxation.
Progressive Income Tax
The higher the income, the higher the fraction of it is payed as taxes. For every additional $ of income, the percent of income paid as tax.
Proportional Tax
All taxpayers pay the same fraction of their income as tax.
Regressive Tax
Takes a larger fraction of income from poor families.
Indirect Taxes
Applied to goods and services, such as sales tax. Easier to collect at retail level.
Direct Tax
Applied directly to individuals and firms, such as income taxes. Easier to tailor to fit personal circumstances.
Effective/ Average Tax Rate
Total Taxes / Total Income
