Chapter 6 Flashcards
Tax base
The values of goods, services, wealth, or incomes subject to taxation
Government budget constraint
The limit on government spending and transfers imposed by the fact that every dollar the government spends, transfers, or uses to repay borrowed funds must ultimately be provided by the taxes it collects
Tax rate
The proportion of a tax base that must be paid to a government as taxes
Marginal tax rate
The change in the tax payment divided by the change in income, or the percentage of additional dollars that must be paid in taxes. The marginal tax rate is applied to the highest tax bracket of taxable income reached
Tax bracket
A specified interval of income to which a specific and unique marginal tax rate is applied
Average tax rate
The total tax payment divided by total income. It is the proportion of total income paid in taxes
Proportional taxation
A tax system in which, regardless of an individual’s income, the tax bill comprises exactly the same proportion
Progressive taxation
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.
Regressive taxation
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
Capital gain
The positive difference between the purchase price and the sale price of an asset. If a share of stock is bought for $5 and then sold for $15, the capital gain is $10
Capital loss
The negative difference between the purchase price and the sale price of an asset
Retained earnings
Earnings that a corporation saves, or retains, for investment in other productive activities; earnings that are not distributed to stockholders
Tax incidence
The distribution of tax burdens among various groups in society
Sales taxes
Taxes assessed on the prices paid on a large set of goods and services
Ad valorem taxation
Assessing taxes by charging a tax rate equal to a fraction of the market price of each unit purchased
Static tax analysis
Economic evaluation of the effects of tax rate changes under the assumption that there is no effect on the tax base, meaning that there is an unambiguous positive relationship between tax rates and tax revenues
Dynamic tax analysis
Economic evaluation of tax rate changes that recognizes that the tax base eventually declines with ever higher tax rates, so that tax revenues may eventually decline if the tax rate is raised sufficiently
Excise tax
A tax levied on purchases of a particular good or service
Unit tax
A constant tax assessed on each unit of a good that consumers purchase
Social security contributions
The mandatory taxes paid out of workers’ wages and salaries. Although half are supposedly paid by employers, in fact the net wage s of employees are lower by the full amount
Rate of return
The proportional annual benefit that results from making an investment
Inflation-adjusted return
A rate of return that is measured in terms of real goods and services; that is, after the effects of inflation have been factored out.
