Chapter 6 Flashcards

1
Q

What are the three sources of funding for governments?

A
  1. User Charges (fees for using government services)
  2. Taxes
  3. Financing
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2
Q

What are the two primary sources of government income?

A
  1. User charged

2. Taxes

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3
Q

What is the “government budget constraint?”

A

The limit on government spending and transfers is imposed by the fact that every dollar the government spends to repay its debts must come from taxes and user charges.

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4
Q

Define “tax base.”

A

The value of goods, services, weather, or incomes subject to taxation.

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5
Q

Define “tax rate.”

A

The proportion of a tax base that must be paid to the government as taxes.

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6
Q

Define “marginal tax rate.”

A

Change in taxes due divided by the change in taxable income.

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7
Q

What is a tax bracket?

A

A specified interval of income to which a specific and unique marginal tax rate is applied.

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8
Q

Marginal tax rate applies only to the ______.

A

Income in the highest tax bracket reached.

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9
Q

Define “average tax rate.”

A

Total taxes due divided by total taxable income.

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10
Q

What are the three types of tax systems?

A
  1. Proportional
  2. Progressive
  3. Regressive
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11
Q

What determines the type of tax system?

A

The relationship between the marginal and average tax rates.

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12
Q

Define “proportional taxation.” What is the relationship between the marginal and average tax rates?

A

Regardless of income, taxes comprise exactly the same proportion.

Average tax rate = marginal tax rate.

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13
Q

Define “progressive taxation” What is the relationship between the marginal and average tax rates?

A

A tax system in which as income increases, a higher percentage of the additional income is paid as taxes.

The marginal tax rate exceeds the average tax rate as income rises.

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14
Q

Define “regressive taxation” What is the relationship between the marginal and average tax rates?

A

A tax system in which as more dollars are earned, the percentage of tax paid on them falls.

The marginal tax rate is less than the average tax rate as income rises.

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15
Q

What is the most important tax in the US economy?

A

The federal personal income tax.

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16
Q

Define “capital gain.”

A

A positive difference between the purchase price and the same price of an asset.

Example: If a stock is purchased for five dollars and then sold for fifteen the capital gain is 10 dollars.

17
Q

Define “capital loss.”

A

A negative difference between the purchase price and the sale of an asset.

Example: If a stock is purchased for 20 dollars and then sold for 5 dollars the capital loss is 15 dollars.

18
Q

Corporations are usually taxes based on __________.

A

The difference between their total revenues and their expenses.

19
Q

Define “dividends.”

A

A sum of money paid regularly by a company to its shareholders out of its profits.

20
Q

If you buy stock in a company that pays dividends, you will often be _______.

A

Double taxed.

21
Q

Define “retained earnings”

A

Earning that a corporation saves, or retains for investment in other activities.

22
Q

Define “sales taxes.”

A

Taxes on the prices paid on most goods and services.

23
Q

What is “Ad valorem taxation?”

A

Assessing taxes by charging a tax rate equal to a fraction of the market price of each unit purchased.

24
Q

A sales tax is a _________ tax.

A

Proportional

25
Q

The most likely response to an increase in a tax rate is ________________

A

A decrease in the tax base.

26
Q

What is an excise tax?

A

A specific tax levied on a particular good or service. Usually, because the government has found that good to be socially undesirable or the item is so essential that people have no choice but to buy it regardless of the tax rate.

Example: Cigarettes and alcohol, gasoline, etc.