Chapter 6 Flashcards
What are the three sources of funding for governments?
- User Charges (fees for using government services)
- Taxes
- Financing
What are the two primary sources of government income?
- User charged
2. Taxes
What is the “government budget constraint?”
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.
Define “tax base.”
The value of goods, services, weather, or incomes subject to taxation.
Define “tax rate.”
The proportion of a tax base that must be paid to the government as taxes.
Define “marginal tax rate.”
Change in taxes due divided by the change in taxable income.
What is a tax bracket?
A specified interval of income to which a specific and unique marginal tax rate is applied.
Marginal tax rate applies only to the ______.
Income in the highest tax bracket reached.
Define “average tax rate.”
Total taxes due divided by total taxable income.
What are the three types of tax systems?
- Proportional
- Progressive
- Regressive
What determines the type of tax system?
The relationship between the marginal and average tax rates.
Define “proportional taxation.” What is the relationship between the marginal and average tax rates?
Regardless of income, taxes comprise exactly the same proportion.
Average tax rate = marginal tax rate.
Define “progressive taxation” What is the relationship between the marginal and average tax rates?
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.
Define “regressive taxation” What is the relationship between the marginal and average tax rates?
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.
What is the most important tax in the US economy?
The federal personal income tax.