Chapter 5 (Supply, Demand and Government policies) Flashcards
Direct tax =?
Direct tax = tax on income/wealth
Indirect tax=?
Indirect tax = tax on sale of goods and services
Specific tax =?
Specific tax = tax on goods or services as a ∑ per unit (100€/10unit, Pend = Pstart – Tax)
Ad Valorem tax =?
Ad Valorem tax = tax on % of the price of a good (2% of total price, Pend = (1+Percentage).Pstart) = VAT
Tax incidence
Tax incidence = the way in which the burden of a taxis shared among participants in a market
Subsidy =?
Subsidy = payment to buyers or sellers to supplement income or reduce costs. Subsidies are levied when the gov wants to encourage
the consumption of smth, but they are most of the time given to sellers in order to reduce the CoP (SC shift to the right)
Deadweight loss (DWL) =
Deadweight loss (DWL) = fall in total surplus resulting from a market distortion (like a tax)
Average tax rate = ?
Average tax rate = total tax paid / total income = % of tax revenue on the income
Marginal tax rate = ?
Marginal tax rate = extra taxes paid on additional unit of income = measure how much the tax syst. discourages people
from working
EXAMPLE: (20% tax on first €50k of income, 50% on everything above €50k)
Lump-sum tax =?
Lump-sum tax = tax of same amount for everyone => Marginal Tax of Lump-sum tax = 0
Benefit principle states that …
The benefit principle states that people should pay taxes based on the benefits they receive from gov services (those who buy fuel are those who use the roads and highways)
Ability principle states that
Ability principle states that taxes should be levied on a person according to how well that person can shoulder the burden.
When evaluating equity, it is crucial to take into account who bears the burden: Vertical equity and Horizontal equity
Proportional tax (flat tax) = ?
Proportional tax (flat tax) = high- and low-income taxpayers pay the same fraction of income
Regressive tax = ?
Regressive tax = high-income taxpayers pay a smaller fraction than low-income ones
